Monday, July 03, 2017

Is Corbyn Right To Support The Pensions Triple Lock?

I am not a Theresa May supporter but her election pledge to end the pension Triple Lock was principled if suicidal, given most older people support the Conservatives. By contrast Jeremy Corbyn has committed to maintaining the triple lock until at least 2022.

The Triple Lock policy guarantees pensions rise by the same as average earnings, the consumer price index, or 2.5%, whichever is the highest. It is was clearly a policy designed to attract the voting power of baby boomers.

Average working incomes have barely risen at all in the last ten years. At lower levels they have been held down by low cost labour from Eastern Europe and immigration, job insecurity and the gig economy, low unionisation and public sector pay cap policies. By contrast the triple lock has increased pensions.

In 2011 the median disposable income of pensioners crossed that of working people, as shown in the chart below.

However, the real issue here is not the Triple Lock but the very low incomes for working families. The lock has had the very real benefit of reducing pensioner poverty, which is to welcomed.

There is an important concern about inter-generational inequality. Over a lifetime people acquire two main assets, their pension and a property. Young people are unlikely to acquire the same pensions or the housing wealth of previous generations.

Young people will pay through their taxes to support the unfunded public sector pensions of the NHS, teachers and civil servants. These liabilities have been estimated at up to 1.85 trillion pounds, so young people can expect to be paying taxes to support these public sector pensions for some time to come. These same young people are unlikely to benefit from the same defined benefit schemes that baby boomers enjoy. They will also be unable to retire in their 50's and 60's as boomers can.

Furthermore the cost of unfunded public sector pensions is deliberately understated. Pensions expert John Ralfe says the boomer "generation of taxpayers is not paying the full cost of the public services it uses, but passing it on to be paid by future generations — taxation without representation on a massive scale."

In private companies the wages of the young will be held down to pay contributions to the deficits of generous former pension schemes. Ironically many of these schemes are now closed to younger people.

In addition to the cost of unfunded public sector pension schemes young people will also need to pay taxes to fund the rising cost of state pensions and increases in health spending, caused in large part by growing numbers of older people. See estimates from IFS below.

When it comes to housing, the failure of recent generations to build housing, combined with tax discounts for landlords, has increased the cost of housing and priced many young people out of the market.

As a society we urgently need to address the issues of inter-generational inequality, however, we mustn't blame policies such as the Triple Lock. There are more fundamental drivers of this inequality.

Maybe greater voting by young people will finally force the government to give these issues some serious attention.