The coalition government policy that led to state pensions rising quicker than wages should be scrapped as part of an “intergenerational reciprocation” for the costs of battling Covid-19, a thinktank has said.
The Social Market Foundation (SMF) proposes that the massive economic cost of the emergency measures deployed to manage the pandemic must be shared fairly between old and young, and that some of the huge anticipated government deficit could be funded by abandoning the so-called triple lock guarantee on state pension rises.
Scott Corfe, the SMF’s research director said: “Quite rightly, society is making sacrifices to protect its elderly right now. There is a clear case for intergenerational reciprocation when it comes to meeting the fiscal costs of the crisis in the years ahead.
“The crisis has emphasised our obligations to other generations, even in the face of personal sacrifice. This spirit must be maintained when the dust settles – with the economic costs of responding to the crisis shared fairly across the generations.”
The triple lock, which was introduced in 2011 by the coalition government, guarantees the basic state pension will rise by a minimum of either 2.5%, the rate of inflation or average earnings growth, whichever is largest.
Before 2011, the state pension rose in line with the retail prices index measure of inflation, which was consistently lower than annual rises in earnings.
Analysis conducted in 2017 by the Institute of Fiscal Studies showed that between April 2010 and April 2016 the value of the state pension had been increased by 22.2%, compared with growth in earnings of 7.6% and growth in prices of 12.3% over the same period.
The economic thinktank said the policy had pushed the value of the basic state pension up to its highest share of average earnings since April 1988, while the government actuary’s department calculated that the increased benefit to pensioners cost roughly £6bn during 2015–16, when compared with rises that would have occurred via earnings indexation.
In its briefing paper published on Tuesday, the SMF said any future austerity programme must not favour pension spending over working-age welfare, as happened after the financial crisis.
The thinktank argues in its paper that the economic impact of lockdown policies – which it says have “have rightly been deployed to protect the lives and wellbeing of those most vulnerable to the virus” – is falling most heavily on working-age Britons, “many of whom face redundancy followed by years of higher taxes, reduced services, and slow economic growth”.
The paper proposes replacing the triple lock with a “double lock” that removed the 2.5% promise and would save an estimated £20bn over five years.
“In the context of an annual deficit that could reach £200bn as we emerge from the crisis, shaving £4bn a year from the growth of the £100bn pension bill is not too much to ask. It would also demonstrate reciprocity from a group whose wellbeing was, rightly, prioritised during the lockdown phase of the crisis,” the SMF said.