Triple lock pension must go, former Labour Cabinet minister admits

A former Cabinet minister has become the most prominent serving Labour MP to publicly admit the state pension triple lock should be scrapped to lessen the financial burden on young people.

Liam Byrne, the chief secretary to the Treasury under Gordon Brown who famously left a note for his successor saying there was “no money” remaining when Labour lost power in 2010, is one of the first MPs to break ranks with his party over the issue.

A growing number of Labour MPs have expressed private frustrations over the party’s commitment to the triple lock, which guarantees that the state pension goes up each year with either inflation, wage increases or by 2.5 per cent – whichever is highest.

However, many MPs also believe that ditching the annual state pension increase guarantee is too politically toxic for the Labour Government to attempt.

But despite those concerns, Byrne now joins a small number of MPs to state publicly that the party must accept the policy is unaffordable in the long term and risks triggering tax rises and wage stagnation for younger generations.

In an essay for centre-right policy think-tank Bright Blue, shared exclusively with The i Paper, he argues for “a gradual move from the triple lock’s ratchet effect toward a more stable uprating mechanism”.

This could involve a “smoothed earnings link”, according to Heidi Karjalainen at the Institute for Fiscal Studies (IFS) think-tank, whereby the state pension increases in line with average wage growth, but can switch to rise in line with inflation during periods of economic instability.

Byrne argues that the baby boomer generation – those born between 1946 and 1964 – is the “primary driver of Britain’s long-term fiscal crisis”, with the cost of sustaining their pensions and healthcare threatening tax rises and lower net wages.

According to the Office for Budget Responsibility (OBR), the triple lock has cost around three times more than initial expectations and leaves public finances “asymmetrically exposed to shocks to inflation and earnings growth”.

It adds around 1.6 per cent of GDP to the state pension bill over the next 50 years, accounting for about half of the projected overall rise in pension spending.

“On current trajectories, that means protecting the incomes of older cohorts while the fiscal cost falls on the generation least equipped to bear it,” wrote Byrne.

He said a gradual move away from the triple lock – combined with redirecting the savings into a sovereign wealth fund – “offers a way to square this circle”.

Byrne backed a proposal by Sir Nicholas Lyons and the Capital Markets Industry Taskforce (CMIT) to invest savings from abolishing the triple lock into a national pension fund that builds wealth for future generations.

Karjalainen supported a “less volatile” pensions system – such as an Australian-style smoothed earnings link – which would be “a lot more predictable… both for public finances, but also for people when they’re considering their retirement incomes”.

However, she said investing savings into a national pensions fund rather than absorbing it into public finances risks short-term “uncertainty”, as changing the triple lock could take years to translate into significant spare cash.

Byrne joins a select few Labour MPs who have spoken out against the triple lock, as well as a growing number of former cross-party ministers.

Last November, Labour MP Chris Curtis said that the “triple lock inevitably cannot last forever”, and in April, his colleague Graeme Downie said it should be reformed to help fund a rise in defence spending.

Ex-Tory chancellor Jeremy Hunt recently told the BBC that the triple lock is “not just unaffordable but actually immoral” as it is being partly funded by debt placed on younger generations.

Former Labour prime minister Tony Blair said last month that the generosity of the triple lock – brought in by the Conservative-Liberal Democrat government in 2010 – was “not affordable” in the long term.

Byrne: ‘End the triple lock to bolster younger generations’

By Liam Byrne, Labour MP for Birmingham Hodge Hill and Solihull North

The fiscal pressure of sustaining the pensions and healthcare of the baby boomers threatens higher tax rates in the future, and hence lower net wages. The baby boomers are the primary driver of Britain’s long-term fiscal crisis. According to the Office for Budget Responsibility’s (OBR) most recent long-term projections, current policy settings, demographic pressures and rising age-related expenditure will push public debt above 270% of GDP by the mid-2070s.

…

We need to alleviate the long-term pressure of the state pension system with a plan to switch to a fully funded system by the 2070s. Building this now would help reduce the pressure on gilts by providing some reassurance that the UK’s fiscal risks are under control. This will require some reform to the triple lock – now that the gap between pension incomes and earnings has been largely closed. 

Sir Nicholas Lyons, working with the Capital Markets Industry Taskforce, notes that continuously increased spending on the State Pension is a central mechanism of today’s intergenerational imbalance. The triple lock is politically popular, but the OBR calculates that it adds around 1.6% of GDP to the state pension bill over the long term, accounting for roughly half of the total projected rise in pension spending.

On current trajectories, that means protecting the incomes of older cohorts while the fiscal cost falls on the generation least equipped to bear it. Lyons’s proposed direction — a gradual move from the triple lock’s ratchet effect toward a more stable uprating mechanism, with the fiscal savings redirected into a sovereign wealth fund — offers a way to square this circle.

The shift would require us, however, to invest the savings from more modest uprating into a national pension fund. A stylised model of those annual savings invested at a 6% return suggests such a fund could grow to roughly half of GDP by 2070, generating an annual return of around 3% to 3.5% of GDP. That would not replace the fiscal burden of the state pension, but it could make a major contribution to the wider pension bill while simultaneously rebuilding the UK’s long-term productive capacity in infrastructure, the energy transition and innovation. 

* This is an extract from Liam Byrne’s essay on addressing intergenerational inequity from ‘Liberalism liberated’, a collection of essays by the think tank Bright Blue.