Ideology vs the triple lock

Centrists want to scrap the pensions triple lock. Matthew Parris says it is now "impossible to defend" and that the old should pay the costs of the lockdown. Also in the Times, Oliver Kamm writes:

People of working age in their 30s, 40s and even 50s are disadvantaged by the way our economy favours pensioners. The cause of intergenerational equity demands some redress for this imbalance.

And Polly Toynbee says it is "rational and inevitable" that the triple lock should go.

I disagree. As I've said before, the triple lock is a thoroughly good idea.

For one thing, its main beneficiaries are NOT today's pensioners but today's young people. An 80-something will get only a few years of real-terms pension increases. But younger people can look forward to decades of such rises. Because your wealth is the present value of future incomes, this benefits them now. Scrapping the triple lock will therefore impoverish young people more than old ones.

If we do this, young people will have to make more provision for their own retirement. But this is both difficult and expensive. Difficult, because we face radical uncertainty about future investment returns, and so we don't know how much to save - and as Janan Ganesh wisely points out, it is as dangerous to save too much as too little. And expensive, because fund managers charge a fortune for the privilege of mismanaging our money. It's more efficient for the state to provide pensions. Not only are the administration costs smaller, but - more importantly - the state is better at bearing risk than the individual.

All this should be obvious. Why, then, do so many people not get it?

I'll concede that there is an issue here: if, as the OBR predicts, average earnings will rise 18% next year as hours return to normal, a rigid adherence to the triple lock would require a huge increase in pensions. But this only tells us that blindly following simple rules can sometimes be silly. It doesn't undermine the principle of the triple lock.

Instead, hostility to it is, I suspect, founded upon some ideological biases: when intelligent people are obviously wrong, I look to ideology*.

One bias here is what I've called the cost bias - the tendency to describe as costs what are in fact only transfers. Oliver says the triple lock "will add £15bn a year to the cost of the state pension by 2060-61". But it's not just a cost, but a benefit. And who'll be getting it? People who are today only around 30 years old.

In some quarters, this bias is magnified by a childish error - the tendency to regard the government's finances as akin to a household's. We don't, however, need MMT to see this is nonsense in this case.

For one thing, the size of this transfer will not be especially large. The OBR estimates that by then state pensions will be equivalent to just under 8% of GDP. That's less than many European countries devote to pensions now.

And for another, people will have to get pensions somehow. Any pension, state or private, must be paid for by working people - if not by taxes to pay the state pension, then by dividends to pay private pensions**. If future workers cannot afford to pay taxes, they'll be unable to pay dividends either. If you're worried by the burden future pensions will impose upon future workers. the solution is to raise productivity, not to scrap the triple lock.

Secondly, there's a tendency to overlook the inefficiencies of the private sector, to fail to see that it does some jobs more expensively than the public sector. Yes Polly Toynbee is well aware of the inequalities generated by the private sector, but I fear she under-appreciates its brute inefficiency.

Thirdly, there's hostility to the principle of universal benefits. Polly says the triple lock is "an extravagant way to steer more towards the better off." But if pensioners' total incomes are too high, the solution is income tax rather than use means-testing with its large deadweight costs.

I fear, though, there there might be another error at work - then tendency to see people merely as members of demographic groups rather than as individuals. Thinking in terms of "young" and "old" pits one generation against another. But this is silly. Young people are individuals with hopes and expectations. The state pension is one of these hopes. In raising it in real terms over time, it thus benefits the young. And because people under-estimate the power of compounding in so many contexts, they under-estimate the benefit to the young of real-terms pension increases - just as they under-estimate just how expensive pension fund charges compound to become. 

So who, then, would benefit from scrapping the triple lock? The answer is pension fund managers. who'll get higher fees as young people have to make more private provision for their old age. What we have here, then, is an example of how centrists - maybe inadvertently at least in this case - help to sustain extractive capitalism.

Equally inadvertently, in doing so they are in fact punishing young people. In this sense, Larkin was right: "They fuck you up, your mum and dad. They may not mean to, but they do."

* I'm not attributing all these biases to all of Kamm, Toynbee and Parris - merely noting that they are common ones.

** There is a caveat here. Private pension providers can invest overseas, and so extract dividends from foreign workers. In principle, though, the state can do this too with a sovereign wealth fund.

Comments

[LJC]

We need to start by reminding ourselves that pensioner poverty arose because Thatcher broke the link between earnings and pensions. Over the following two decades earnings rose faster than prices and, because the poverty line is defined as 60% of median earnings, this progressively pushed more pensioners into poverty.

Now if the RPI, which was the measure of inflation used then, had accurately reflected the cost of living for pensioners this would not have been so important. But for pensioners (and for poor pensioners in particular) costs of utilities and food were most important, while the cost of foreign holidays and personal computers mattered very little. As a result RPI did not adequately represent the true increases in cost of living for pensioners and pensioner poverty was a reality, not just a statistical artifact.

That said there is an argument for reducing the triple lock to a double lock (earnings and prices). What is essential is that the link to earnings is never broken again.

Toynbee also fails to understand that the Pension Credit was merely a way of avoiding raising pensions. Someone who had no occupational pension would benefit; while those who had saved all their lives, but were in lower paid employment would find their occupational pensions and savings offset by reduced Pension Credit; in effect taxing them at a marginal rate higher than millionaires, but one that would be familiar to benefits claimants in the poverty trap.

[Adrian Perry]

Your argument assumes that the triple-lock will remain long enough for a twenty year old to enjoy it in retirement. I’ve seen safer bets.

[huwdavies]

Points well made. Way back, probably late 80's, we were encouraged to contract out into private pension plans. By the time I retired the plans had generally underperformed,at a time when fund managers were enjoying record earnings! The whole thing stinks of "scam" so that wealth could be sucked out of pension "pots" by applying disproportionate fees & commissions.

[D]

If you think of individuals/generations, then triple lock now does benefit people who are young now (assuming it remains in place).

If you think about how society treats it's current young and current old (now and in the future) it benefits people when they are old and costs them when they are young.

We probably want to be looking at have property v have not poverty rather than young v old.

[cjcjc]

I take those points, although surely a double lock - earnings or prices - would serve the same ends without risking an absurd outcome were there to be a bout of deflation?

[Rich]

Young people don't believe they'll get the state pension because some excuse will have been found by then to cancel it or make people work til they're 100 before they can collect it. After a series of increases in the pension age I'll have to make it to nearly 70 to collect, whereas my mother picked it up from her 60th birthday.

But assuming that the goal is to increase the pension to some % of GDP, why not simply do that? If pensions should be x% of GDP, make pensions be x% of GDP rather than having these silly and eye-watering increases every year? (Yes, it'll need to be smoothed out somehow to deal with recessions and booms).

[Mike Newman]

The "old"pension model whether or private assumed you retired at 60/65 and died at 70/75. Average life expectancy is now 85/86 and extending unless covid 19 radically changes long term trends. This means pensions are in payment for at least 10 years longer than before. Unless there is new funding it seems only logical and right that people work longer before. And furthermore I don't see what people have to complain about?

[Paulc156]

@ Mike Newman
"Average life expectancy is now 85/86 and extending unless covid 19 radically changes long term trends"

1. It's not even 80 for men. At 79.9yrs. And around 83 for women.
2.Apart from 2019 it's not been extending either:

"Longevity improvements in England first faltered in 2011 and had plateaued since 2013, with critics blaming austerity and NHS cuts. Among women, life expectancy fell in both 2012 and 2015."

https://www.google.com/amp/s/amp.theguardian.com/society/2020/mar/03/life-expectancy-in-england-rebounds-after-years-of-stagnation

[Blissex]

«The "old"pension model whether or private assumed you retired at 60/65 and died at 70/75. [...] This means pensions are in payment for at least 10 years longer than before.»

This argument is based on the common use of expectation of life *at birth*, but what matters for the cost of pensions if expectation of life *at retirement age*, quite a different concept, as most of the extension in the expectation of life at birth has come from a huge fall in early deaths from illness and accidents. Sure more people also live longer lives, but that's largely limited to relatively rich people working in non-disabling jobs, that is middle class people and women tend to live longer.

«Unless there is new funding it seems only logical and right that people work longer before.»

And that's the issue: that providing good pensions that last for an indeterminate period is quite expensive, and upper class people think that they don't need them as poverty insurance, so they greatly object to having them for everybody (as paying them increases their taxes or reduces their profits).

[Blissex]

«The "old"pension model whether or private assumed you retired at 60/65 and died at 70/75. [...] This means pensions are in payment for at least 10 years longer than before. Unless there is new funding it seems only logical and right that people work longer before.»

The other huge and common mistake made by many propagandists is to look *only* at the costs of old age pensions, as a "dependency ratio" between workers and pensioners only.

Instead what matters is the overall ratio of workers to non-workers (all "dependents"), and non-workers include young people not yet of working age and non-working spouses (mostly women).

The percentage of people who work among the population has remained mostly constant for decades even if (middle class and female) pensioners do live longer because there has been a fall in the number of non-working young people and in the number of non-working spouses.

So broadly speaking there is no "affordability crisis", no shortage of funding.

And if there is a shortage of funding then there must be either one of these outcomes:

* Today's workers will have to save a lot more individually, which is pretty much the same, only less efficient, as paying higher NI and general taxes.
* If they cannot do that, today's workers have to continue working for longer, and then somehow there must be plenty of well-paying jobs that are suitable for sickish and weak older workers.
* If such jobs don't happen, many of today's workers will have to accept dire poverty in retirement, as in the past, which is the overall plan.

[Blissex]

«pensioner poverty arose because Thatcher broke the link between earnings and pensions.»

Please that's so silly: if we are talking about the state pension, its level is so low that it is *already* pensioner poverty, unless the pensioner on just the state pension somehow owns a property and also remortgages it.

Pension poverty it not an issue with the state pension, but with private pensions because of three reasons:

* Thanks to Thatcher, Blair, Osborne, lots of people became "more competitive" by losing their jobs with decent pay and defined benefits pensions and had to make do for decades with casual jobs with low pay, which did not allow them to build a decent personal pension.

* Even those who stayed in jobs lost by and large their good pay and defined benefit pensions, replaced by below-inflation pay rises (for 20-30 years at least) and by a cut of pensions contributions by 60-70%, with the result that the new "money purchase" pensions are usually 1/3 of older "defined benefit" ones.

* Especially in the south property costs ballooned and many who were not property owners, either immigrant northerners, or poor southerners, ended up saving for the property-shaped pension pots of affluent southerners instead of their own, because of rising rents and house prices.

At the same time that a retirement poverty has increased, there has been also also a massive rise in the living standards of a significant minority of pensioners, especially affluent tory ones owning properties in the south and working for sectors like finance and real estate that have boomed for decades as they been showered with "help" (lots of taxpayer and BoE funds) by several tory governments.