The welfare bill is big and getting bigger. We now spend over £330bn a year on all forms of welfare combined. For the last 13 years, welfare spending has exceeded revenues raised from income tax, a stark if depressing comparison.
There are various factors within that total. Youth unemployment is alarmingly high, as tax hikes and regulation on employers make it harder to hire people. The number of people on incapacity or sickness benefits has risen to more than four million, up from 2.8 million in 2018.
Successive chancellors have identified welfare spending as a problem for the public finances that must be addressed. Yet we often forget that the outright majority of the welfare bill is not the unemployed, those unable to work, or even in-work income support. A total of £177 billion a year – 55 per cent of all welfare spending – goes to pensioners.
What’s more, that has risen fast and is set to keep on rising. When the Conservative/Lib Dem Coalition government introduced the pensions triple lock, it did so both to secure Lib Dem support to govern and to address a genuine problem of pensioner poverty. It worked on both measures: since 2012 the basic state pension has increased by a remarkable 71 per cent. The pension is now worth 11.4 per cent more than it would be had it simply tracked inflation over the last decade.
So what? Wasn’t the point to catch up on years of lagging pensioner income? Well, yes – but having done so, the triple lock is still in place as a guaranteed ratchet for further, seemingly eternal, real terms increases. In the words of the National Institute of Economic and Social Research (NIESR), a permanent triple lock is “unsustainable”, effectively guaranteeing that pensions will always rise faster than wages.
NIESR gives the example of the 2022 inflation spike. Pensions rose rapidly on the inflation guarantee of the lock – and then, once inflation settled back down and wages began to rise, allowing workers to catch up somewhat on the cost of higher prices, pensions rose again thanks to the wage growth guarantee too.
As NIESR puts it, “this flaw turns the triple-lock policy into a disproportional intergenerational transfer, rather than a sound state pension.” Money is guaranteed to flow in increasing quantities from younger, working-age adults, who are already struggling, to their parents and grandparents.
This isn’t a hypothetical; it’s happening right now. The Institute for Fiscal Studies says that “the average pensioner is at least as well off as the average working-age person” – yet pensions policy guarantees that this issue of intergenerational unfairness will get worse, not better.
Once you take into account housing costs, 46 per cent of pensioners earn more than the average working-age household. Remarkably, politicians are now grappling with the apparently unforeseen challenge that recipients of the state pension are crossing the income tax threshold.
The cost is ever-growing, too. The OBR forecasts that the triple lock will cost £15.5bn a year by 2030, three times the amount originally predicted at the policy’s outset. With an ageing population, and a policy ratchet which guarantees the bill will be the highest of three measures each year, that could triple by the 2070s. It seems the nation is at risk of becoming a pensions policy with an economy attached.
None of this is a surprise. Way back in 2017, the independent Cridland Review on the future of pensions recommended that the triple lock should be scrapped by 2020, having done its job, to protect against ever-rising future costs. Nine years later, here we are.
Unfortunately, the policy has become something which we cannot afford to pay for, but also something we appear politically unwilling to ever end. Only last month, our new Prime Minister pledged that he would preserve the lock, alongside his rivals and opponents.
Underpinning this politically unassailable position is a dangerous misunderstanding of how the public finances work, which politicians have intentionally connived to encourage rather than dispel.
The lie of national insurance encourages the idea that today’s retirees have saved up for their pension, when in truth NI is simply income tax in disguise. All of those workers’ contributions (and more) were spent at the time they paid them, and today’s pension payments, just like other welfare benefits, are funded hand-to-mouth by the current contributions of an embattled and limited number of working-age taxpayers.
What’s more, older citizens vote in greater numbers than their children and grandchildren. Andy Burnham, like his predecessors, evidently has no intention of angering that sizeable, active portion of the electorate. So the triple lock – and its enormous cost – will continue.
Here comes the worrying part: in a battle between an unsustainable bill and an unchangeable policy, mathematics will beat politics in the end, by brutal force if necessary.
Money remains tight. Borrowing remains alarmingly high. The tax burden continues to be at record levels. If the triple lock – and the £177bn pensioner benefits bill more broadly – are untouchable, then the Prime Minister and Chancellor will have to find even more money from the remainder of the Exchequer’s spending.
The welfare budget is so large that no government can afford to ignore it, which requires them to find savings within the minority of that spend which does not go on pensions. That means disability, incapacity and unemployment benefits – in other words, exactly the reforms that drove Labour MPs to open rebellion against Keir Starmer and Rachel Reeves in the first place. It seems we are heading back to square one.
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