The demise of the triple lock.

pafpcg

Grumpy_chap said:

The 2.5% part of the triple lock is, and always was, flawed.  The reason being that the level is, and always will be, notional.  Why choose 2.5% and not 2% or 3%?

Notional?  More like "political" or perhaps more accurately "monetary policy"!

The 2.5% of the triple lock is akin to the remit of the Monetary Policy Committee of the Bank of England to have a target for an annual rate of inflation which is currently set at 2% for CPI.  This target changes according to economic/political policy - in 1998 when the MPC has formed, it was originally 2.5% (for RPI excluding mortgage interest which was the precursor to CPI). 

For a rational discussion of the triple-lock policy and its impact on the level of the state pension, I suggest SPERI British Political Economy Brief No. 27 "The long-term impact of the state pension ‘triple lock’" published by the University of Sheffield.  It includes this nugget: "The notion that the triple lock is inter-generationally unfair overlooks the impact of the policy on the de facto state pension accrual rate for today’s young people. The triple lock should be seen as a pensions policy, not simply a pensioner policy; it clearly affects current pensioners, but is also designed to modify the functioning of the UK pensions system more generally".

zagfles

pafpcg said:

Grumpy_chap said:

The 2.5% part of the triple lock is, and always was, flawed.  The reason being that the level is, and always will be, notional.  Why choose 2.5% and not 2% or 3%?

Notional?  More like "political" or perhaps more accurately "monetary policy"!

The 2.5% of the triple lock is akin to the remit of the Monetary Policy Committee of the Bank of England to have a target for an annual rate of inflation which is currently set at 2% for CPI.  This target changes according to economic/political policy - in 1998 when the MPC has formed, it was originally 2.5% (for RPI excluding mortgage interest which was the precursor to CPI). 

For a rational discussion of the triple-lock policy and its impact on the level of the state pension, I suggest SPERI British Political Economy Brief No. 27 "The long-term impact of the state pension ‘triple lock’" published by the University of Sheffield.  It includes this nugget: "The notion that the triple lock is inter-generationally unfair overlooks the impact of the policy on the de facto state pension accrual rate for today’s young people. The triple lock should be seen as a pensions policy, not simply a pensioner policy; it clearly affects current pensioners, but is also designed to modify the functioning of the UK pensions system more generally".

It's clearly not "designed" in any such way, it's designed to look good politically. Or rather not look bad (peanuts etc). Is there a rational reason why pensioners should get a real terms increase in state pension when inflation is low, but not when inflation is high?

The current predicament exposes an even bigger flaw - a big drop in average earnings followed by a big rise, even if back to the same level as previously (ie no overall rise in average earnings) could result in a massive increase in the state pension.

A sensible policy would link to average earnings/inflation/ whichever is higher but using an index. For instance if the earnings and inflation indices are both 100 today, then if one rises to 102 and the other to 103, then the state pension goes up 3%, and it remains tied to the higher of the two. So if the following year the inflation index goes to 104 but the earnings index drops to 90, the state pension then goes up by 104/103 (about 1%). Then if earnings go up to 110 the following year it goes up by 110/104. So the pension continues to maintain its value in both real and earnings terms, without the flaws of doing it based on pure annual changes. 

The point about future pensioners benefitting for the current increases is frankly not believed by anyone. The state pension is likely to change in many ways over the next few decades, and if it becomes expensive it's almost certain that such changes to make it cheaper will happen. Particularly - increasing the age at which it's payable, as has already happened.

MarkCarnage

But it caused enough of a media provoked storm to make the government make irrational policy changes to pander to the stupid. Like has happened many times since...

Very sadly, pandering to the 'focus groups' as the stupid are now called, appears to win elections, if you pick the right ones at the right times.....

MACKEM99

I wonder how may of those gifted 80% of their £2.5k monthly salary by the tax payer would be able to manage on a pension?

steampowered

MACKEM99 said:

I wonder how may of those gifted 80% of their £2.5k monthly salary by the tax payer would be able to manage on a pension?

I would imagine quite a lot, given that the average disposable income of pensioners is now greater than the average disposable income of workers. That is really an extraordinary switch around from what was the status quo 20 years ago and for generations before that.

https://www.ftadviser.com/retirement-income/2019/04/26/pensioners-have-more-spare-cash-than-workers/

zagfles

steampowered said:

MACKEM99 said:

I wonder how may of those gifted 80% of their £2.5k monthly salary by the tax payer would be able to manage on a pension?

I would imagine quite a lot, given that the average disposable income of pensioners is now greater than the average disposable income of workers. That is really an extraordinary switch around from what was the status quo 20 years ago and for generations before that.

https://www.ftadviser.com/retirement-income/2019/04/26/pensioners-have-more-spare-cash-than-workers/

Though as the article implies - current pensioners are likely to be in a sweet spot - still largely getting DB pensions, state pension from 65 or (for women) even younger, except those who reached SPA in the last few years, generally got housing much cheaper in real terms than current workers. 

The pension prospects for current workers are nowhere near as rosy. Partcularly in the private sector where active DB pensions have virtually been made extinct.

itwasntme001

zagfles said:

steampowered said:

MACKEM99 said:

I wonder how may of those gifted 80% of their £2.5k monthly salary by the tax payer would be able to manage on a pension?

I would imagine quite a lot, given that the average disposable income of pensioners is now greater than the average disposable income of workers. That is really an extraordinary switch around from what was the status quo 20 years ago and for generations before that.

https://www.ftadviser.com/retirement-income/2019/04/26/pensioners-have-more-spare-cash-than-workers/

Though as the article implies - current pensioners are likely to be in a sweet spot - still largely getting DB pensions, state pension from 65 or (for women) even younger, except those who reached SPA in the last few years, generally got housing much cheaper in real terms than current workers. 

The pension prospects for current workers are nowhere near as rosy. Partcularly in the private sector where active DB pensions have virtually been made extinct.

Precisely.  I have said so numerous times that the baby-boomer generation lived through their working lives with, what can now be clearly seen, with generous pension plans, low housing costs, rising real wages and lower financing costs causing asset prices appreciation.

None of these things I have mentioned will be of benefit to the current working age population in their 20s/30s/40s.  Some may say, "well I had to pay interest rates of over 15% on my mortgage", but these same people fail to realise that rates at those levels did not last long and came crashing back down again, real wages were increasing strongly at that time and real terms house prices were significantly lower than what we have today.

Probably the single biggest factor for the massive wealth transfer to the current cohort of retirees is falling interest rates.  This has led to lower mortgage costs, higher equity and house prices, more valuable DB pension plans, more valuable state pension plans, more valuable GARs.

It is really only the public sector that now has generous pension plans and even they were now becoming more expensive for the current working class cohort.  You can see now how policy did not have this foresight nor did they consider the massive reinvestment risk when the government were dishing out DB pension plans to public workers.  Clearly workers need to be compensated at the free market clearing price but do we really have a free market in areas of the public sector including the NHS?

itwasntme001

Just to add on the above by way of an example; I know of many couples (including my parents) who have retired or close to retiring who have not worked in typical "professional" careers and who do not have any more qualifications than A-level and they all are very well off, all with a minimum net worth of £1m and that is not even counting any of their private pensions they may have.

Now you have so many young "professionals" with undergraduate degrees working in low wage occupations where it is very difficult to see any decent real wage growth in their careers and with no gold plated DB pension plans to look forward to.

bigadaj

itwasntme001 said:

Just to add on the above by way of an example; I know of many couples (including my parents) who have retired or close to retiring who have not worked in typical "professional" careers and who do not have any more qualifications than A-level and they all are very well off, all with a minimum net worth of £1m and that is not even counting any of their private pensions they may have.

Now you have so many young "professionals" with undergraduate degrees working in low wage occupations where it is very difficult to see any decent real wage growth in their careers and with no gold plated DB pension plans to look forward to.

Though the above is partly due to a supply and demand element behind the value of a degree. If you produce people with degrees that are actually of lower academic standard than those with a levels in previous generations its no surprise to find that many graduates have a lower earning potential. 

itwasntme001

bigadaj said:

itwasntme001 said:

Just to add on the above by way of an example; I know of many couples (including my parents) who have retired or close to retiring who have not worked in typical "professional" careers and who do not have any more qualifications than A-level and they all are very well off, all with a minimum net worth of £1m and that is not even counting any of their private pensions they may have.

Now you have so many young "professionals" with undergraduate degrees working in low wage occupations where it is very difficult to see any decent real wage growth in their careers and with no gold plated DB pension plans to look forward to.

Though the above is partly due to a supply and demand element behind the value of a degree. If you produce people with degrees that are actually of lower academic standard than those with a levels in previous generations its no surprise to find that many graduates have a lower earning potential. 

Well yes but the point remains the same - before you did not need a degree to get wealthy.  Now the average degree (+ the wasted student debt) is not enough.