Ben Ramanauskas wants to abolish the pensions triple lock. As a longstanding advocate of it, you'd expect me to disagree. And I do, but not violently.
Ben proposes replacing the lock with simply raising the state pension in line with average earnings. This has two great merits.
One, as Ben says, is that it aligns the interests of pensioners and workers. It tells today's pensioners: "you're in the same boat as workers: if they become better off so will you; and if they don't you won't." I'm not as sure as Ben that this will encourage pensioners to support pro-growth policies. But it might weaken their support for the parties of reaction and widen the coalition of pro-worker interests, which is good.
The second merit is that Ben's proposal isn't very much different from the triple lock simply because in normal times wages should rise faster than prices or 2.5%. This preserves the key feature of the triple lock, that it sees the state pension rise in real terms.
Over time, this amounts to creeping nationalization of the pensions industry, because the higher is the state pension the less need there is for us to provide for a private one.
This is a good thing because the state is better able to provide pensions than the private sector as it can better manage risk. It can pool longevity risk better; tax receipts are less volatile than investment returns; and distribution risk (the risk of incomes shifting from profits to wages) is less of a danger for the state than for private pensions.
Here, we must guard against a particularly silly and nasty notion - that real-terms rises in the state pension are unaffordable.
The OBR estimates that if the triple lock remains in place public spending on the state pension will rise from 4.9% of GDP now to 7.9% in 2073-74 - but this is less than many European countries such as Denmark France or Germany spend today. If a decent pension is affordable for them today, it'll be affordable for us tomorrow.
What's more, we must remember that there is no magic money tree. If we as a society cannot afford to pay taxes to provide state pensions then we cannot afford to pay into private ones either, if only because administrative costs on the latter are so eye-watering. On a £100,000 pension pot invested over 20 years a management fee of 0.5% a year compounds to over £20,000. The cost of administering the state pension is much smaller: fund managers are richer than civil servants, which is a clue.
I therefore strongly disagree with new pensions minister Torsten Bell that the triple lock is "silly".
My argument with Ben, however, centres upon what happens on the occasions when prices do rise faster than wages, such as when oil and gas prices soared in 2022*. Younger people have insurance against this risk by virtue of having more years in front of them in which to enjoy normal times in which real wages rise or in which they might enjoy a steep drop in commodity prices. Older people, by contrast, are closer to the exit and so don't have so much of this insurance. Worse still given successive governments unforgiveable failure to sort out social care insurance, some will face the risk of a drop in real incomes coinciding with a big bill for social care.
There is therefore a case for pensioners getting insurance against prices rising faster than wages. The triple lock does just this whereas Ben's proposal does not.
It does so, however, at a cost. In this situation there's a bigger fiscal giveaway than there would be under Ben's proposal. That would mean higher inflation, relative to what it would be in his plan. That, in turn, would require either a fiscal tightening elsewhere; or higher interest rates; or tolerating of a higher path for inflation which itself is nasty. Whichever we choose, there's a cost.
For me, this cost is mitigated by the advantage of accelerating the creeping nationalization of pensions. And, remember, the triple lock is not so much a transfer from younger people to old ones as from younger people to their older selves; the power of compound growth means that it is youngsters more than oldsters who benefit most from the triple lock, a fact they are smart enough to see.
I can appreciate, though, that others might find the cost too high.
Let's be clear, though, that it is here that we see the merit or not of Ben's proposal. The issue is not one of fiscal sustainability or intergenerational justice, but simply of how or whether we insure people against a particular type of economic risk.
* You might think that the danger of long-term falls in real wages are another issue here. I'm not so sure. Insofar as these occur because of a shrinking economy (rather than shifts from wages to profits) they mean we as a society can't afford so much of anything - be it decent pensions, public services or private consumption. It's not clear that future pensioners should be immune from this collective risk.
** I'm not going to bother engaging with Kemi Badenoch's proposal to means-test the triple lock, for the same reason that I don't bother cleaning the pants of toddlers who have wet themselves.
You say there is no magic money tree but I can think of 3 legal ways for the government to get money to pay who ever it wants.
1. It can print money in the royal mint.
2. I could tell the bank of England to pay what ever it likes to ever it wants (The is a law that says It can not say no).
3. It could just pay from the "ways and Means" account with the bank of England.
So why dose it borrow from the "Market" which is the most expensive way the of borrowing?
Posted by: Ben Oldfield | January 17, 2025 at 01:56 PM
One issue with the triple lock is that the increase each year is the best of 3, which doesn’t allow it to manage variations in any quantity well, and there is a lot of variation as per your chart, ie the 2.5% average growth in wages masks a lot of up and downs. We could have a triple lock which compares the cumulative changes in the 3 values from some date and that would already be cheaper and arguably fairer (with some provision that state pension doesn’t go down in any given year).
Posted by: ShepherdBridge | January 18, 2025 at 12:07 PM
Cleaning the pants of toddlers is just one of those things a parent has to do. Nothing like changing a full and smelly nappy on the seats of a packed NY-Chicago plane...
Posted by: Laban | January 18, 2025 at 05:02 PM
It would follow that undermining the state pension leads to a bigger financial services sector in future (compared to your ‘creeping nationalisation of pensions’ scenario at least). More white collar jobs is the central plank of the Resolution Foundations’s big report last year wasn’t it?
Posted by: Glen Hoddle | January 19, 2025 at 02:09 PM
Has our blogger heard how banks create money using "the alchemy of banking"? What if we really want Cost of Living Adjustments, not growth?
Posted by: rsm | January 19, 2025 at 07:18 PM
«simply raising the state pension in line with average earnings. This has two great merits. One, as Ben
says, is that it aligns the interests of pensioners and workers. It tells today's pensioners»
That will be described as "inflationary" (note: according to Economics only labor costs are
"inflationary", not pension costs or or asset costs).
«Over time, this amounts to creeping nationalization of the pensions industry, because the higher is the
state pension the less need there is for us to provide for a private one. This is a good thing because
the state is better able to provide pensions than the private sector as it can better manage risk.»
But that is... COMMUNISM! :-)
Why would the government dare to confiscate from financial sector of the 30-60% of every private
pensions that they extract as "fees" and at the same time confiscate from existing investors the big
share price rises from the demand pressure by workers buying them for pension accounts?
«If we as a society cannot afford to pay taxes to provide state pensions then we cannot afford to pay
into private ones either»
But that is precisely the point: to cut pensions for ex-employees. Once upon a time employers provided
pension schemes to defer paying a part of the wages of their employees, but now that worldwide there are
billions of potential employees who have more pressing issues than deferred pay for when they are old
and are willing to work without that, why should "lazy, uppity, overpaid" english worker still get paid
when they have stopped working?
Posted by: Blissex | January 20, 2025 at 11:45 AM
«On a £100,000 pension pot invested over 20 years a management fee of 0.5% a year compounds to over £20,000.»
The benefit for the financial sector is not just 20% because the management fee is not the only fee and often management fees are not just 0.5%. The per cent take of the financial sector from each private sector pension is often 1% of the assets.
There is an indirect proof: in the famous "pension mis-selling" ("fraud") story the salespeople were usually awarded 30% of the value of each pension account they got converted from final-salary schemes, which obviously means that the profit by the pension providers was significantly larger than that 30%, and that still does not account for the the percentages taken by the traders, stock exchanges, depositories etc. used for those accounts.
Private pensions for "dumb money" retail customers is a veritable money gusher for the financial sector and they are going to do whatever it takes to keep it gushing.
Posted by: Blissex | January 20, 2025 at 11:48 AM
«why should "lazy, uppity, overpaid" english worker still get paid [by employers] when they have stopped working?»
The bigger question that I usually try to address is why so many english workers have been voting for that for the past 40 years of thatcherism. The answers as usual are:
* Many older workers who are the vast majority of MPs and officials of all parties, and of the professional classes, are usually still on decent final salary pensions and could hardly care less about what happens after them ("after me the deluge", "blow you! I am alright Jack:).
* Many older workers who are the vast majority of MPs and officials of all parties, and of the professional classes, also have significant investments in property and regard big government guaranteed property gains redistributed from the lower classes as both larger and more secure than pensions, and do care about those gains a lot and vote zealously for them.
https://blissex.wordpress.com/wp-content/uploads/2024/07/polihousingoldpeoplebigmoney.jpg
Boris Johnson: «I think the vast majority will want to put their pots into the market with the greatest yield over the past 40 years – and that is property»
Chief Economist of the BoE: «Haldane believes that property is a better bet for retirement planning than a pension. “It ought to be pension but it’s almost certainly property,” he said. “As long as we continue not to build anything like as many houses in this country as we need to ... we will see what we’ve had for the better part of a generation, which is house prices relentlessly heading north.”»
Posted by: Blissex | January 20, 2025 at 11:58 AM
«the triple lock is not so much a transfer from younger people to old ones as from younger people to their older selves»
But if they pay for triple lock when they work and the triple lock is gone (or equivalent) when they start getting their pensions that does not apply.
A court has ruled that state pensions are not a contractual payment or an entitlement, they are just a welfare benefit that Parliament can change at any time, as this very discussion demonstrates.
Again there are billions of workers in the world who do not require having pensions, never mind the triple-lock, because they have bigger more urgent issues. Good luck to younger people in high-costs countries.
Posted by: Blissex | January 20, 2025 at 12:16 PM
«does not account for the the percentages taken by the traders, stock exchanges, depositories etc. used for those accounts»
Also the profits made by front-running the trades of those "dumb money" customers or more simply by watching what they do and doing the opposite because it is well knows that retail investors get their timing (especially and choices wrong in 70% of cases.
Posted by: Blissex | January 20, 2025 at 12:28 PM
«Once upon a time employers provided pension schemes to defer paying a part of the wages of their employees»
And that is why for some decades the labor unions found it easier to get better increases in defined-benefit pension plan (and healthcare plans in the USA) than in base wages: for the executives at that time the costs would impact later executives as the "baby boomer" workforce retired and become older, so "kick the can down the road".
«regard big government guaranteed property gains redistributed from the lower classes as both larger and more secure than pensions»
Their point of view is quite rational and can be easily explained by looking at who is going to pay for pensions:
* With defined-benefit pensions the pensions of the lower classes get in effect paid by upper class people as those pay most of the taxes or suffer most of the resulting lower share prices or dividends.
* With share-based pensions the pensions of the middle and upper classes get paid by the lower class via lower labour costs boosting corporate dividends or share prices.
* With property-based pensions the pensions of the upper and middle classes get paid by the lower classes via higher property rents and prices.
For middle class voters defined-benefit pensions look less secure because the upper class who pay them for the lower class are politically powerful and can push back (and indeed did so successfully in the past 40 years) but share and especially property based pensions are safer because the lower classes who pay for them do not have the political power to push back (also because most officials of all parties and labour unions and government and most professions are invested in property and shares).
The other advantage is that With property and share based pensions the lower classes not only have to pay the pensions of the middle and upper class but also do not get pensions or they are nugatory, so overall the pension bill is more "affordable".
Posted by: Blissex | January 20, 2025 at 02:38 PM