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May 12, 2006



This is the blog where doubtless one of your readers - or your goodself - will correct me if I've got this wrong. But memory says that it was Labour who cut the link to earnings, and instead attached it to predicted earnings inflation in the year ahead. Then they underpredicted each year and added NO correction the next year. Thatcher's attaching of the pension to RPI was an advance at the time since it made the business objective and, once inflation started to decline, the backward-looking mechanism meant that people got rises ahead of inflation in the year in question. Time for a change, of course, but where is the guarantee that the earnings link won't mutate into a bit of a fraud, like last time?

Robert Metcalfe

It was indeed Labour who cut the link to earnings in 1997 and linked it to prices. But in more than two occassions they have increased the basic state pension (BSP) to over the rate of inflation, recognising that the low level of inflation was indeed a problem. What one has to realise is that once you account for BSP, the second state pension, pension credit and the winter fuel payment, the Labour government spends much more on the poorer pensioners that the Tories ever did. The only problem with linking the BSP to prices (and not earnings) is that by 2050, the BSP is worth £35 (compared to £82 now), so the majority of income that pensioners will recieve will be from means-tested benefits (i.e. pension credit), which will obviously affects savings. So this has led to the increased specualtion of linking BSP to earnings as argued for by Adair Turner. The problem for the Labour government is that pension credit is Gordon Brown's baby and he won't let it go without a fight.


The link between earnings and the basic state pension was introduced by Labour in 1974, and abolished by Thatcher in 1980. However, I think both the Thatcher and New Labour governments did occasionally raise pensions by more than RPI.
In the 50s and 60s, pensions sometimes were not raised in line with prices; they didn't understand money illusion so well until the later 60s.


What else will change? Presumably the 40% tax relief (for higher rate payers) on contributions will stop fairly soon, then the lump sum will stop being tax-free, but will that happen before or after the pension itself becomes means-tested? Once you have a means-tested pension, you don't need means-tested credits, do you? Anyway, can anyone confirm that the Wilson-Callaghan governments eventually used predicted future earnings to index-link, not actual, factual previous year's earnings? What will be done this time and what will its failure mode be?

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