LONDON (Reuters Breakingviews) - The UK’s pension pickle is a key credibility test for Theresa May. The UK prime minister is dithering over whether to keep guaranteeing above-inflation increases to pensioners. She shouldn’t.
The triple lock, which fixes increases in the state pension to the higher of inflation, earnings, or 2.5 percent, was a clumsy way of doing something good. It is expensive and arbitrary, but in 2010, when it was introduced, pensions had stagnated for decades.
That’s no longer the case. The new state pension is just below 25 percent of UK full-time earnings, similar to the peak in the 1980s, and above the Organisation for Economic Co-operation and Development average. It is close to the minimum income needed to live, as defined by Loughborough University – before private pension provision and other giveaways are taken into account. The median household income of UK pensioners is higher than non-pensioners.
Keeping the lock is expected to increase the amount spent on public pensions by about 1 percentage point to more than 7 percent of GDP by 2067, according to the Office for Budget Responsibility. That assumes the triple lock pushes up pension spending by 0.34 percent, on average, over average earnings growth. It could be more expensive if earnings and inflation stagnate due to the spread of automation. Higher social security will push up costs for employers and workers.
Theresa May hinted this week in parliament that she would scrap the triple lock. But reform could still be bungled. One plan, tying pensions to the higher of inflation or earnings, would still be bad: pensions would rise above earnings in scenarios where the economy is weak but inflation is high. A better proposal to align pensioners’ and non-pensioners’ interests would be to fix pensions just to earnings, perhaps with minor smoothing tweaks.
Such a move could easily be ducked. Current high-ish inflation means the lock will not cost much for the coming parliament. But the UK’s decision to leave the European Union gives May a reason to prioritise spending on jobs and investment. Keeping it now will make scrapping it harder in future, and her opposition is weak. Tough action would cement the prime minister's so-far unsubstantiated claim of strong and stable leadership.