Alexander Hitchcock is a researcher at Reform.
In the run up to the Summer Budget, George Osborne committed to building a “welfare system that is fair to working people”. That commitment is now in tatters, with politicians and experts across the political spectrum attacking his Tax Credit cuts. Leading up to this month’s spending review, the Chancellor and his colleagues are now seeking to mitigate the impact of those cuts whilst retaining the headline £12 billion savings. Cutting Universal Credit has been mooted, but morally and politically this would be another big mistake. Instead, the Chancellor should listen to the Work and Pensions Select Committee who recently questioned the “intergenerational balance of welfare expenditure”.
The Chancellor can never build a fair system while the pensions triple lock remains in place. Since 2011, this has increased the value of the state pension by the highest of CPI inflation, average earnings or 2.5 per cent. Whilst above inflation increases to the state pension once had the laudable goal of alleviating poverty, this approach is no longer necessary. Once housing costs are considered, median pensioner incomes are higher than non-pensioner incomes.
The triple lock is also fiscally irresponsible: it costs £6 billion a year more than an earnings link. Over the next 50 years, the policy will increase government debt by 26 per cent of GDP. As a result, the Government has targeted welfare savings almost exclusively on working-age families. The Tax Credit cuts—costing low-income families, on average, £1,300 a year—are just one example of this. A less well reported example is the Government’s commitment to erode the value of many working-age benefits by freezing their rates for four years. So whilst better-off pensioners will see the value of their pension increase by almost 15 per cent by 2019-20, many poor families will be relatively poorer than they are today.
The triple lock has been a popular policy within the Conservative Party and abandoning it would be politically difficult, but a fair approach to fiscal consolidation demands it. Several prominent Conservative voices are making this case. In June, former defence minister Liam Fox argued it is “difficult to explain” a policy that gives pensioners at least a 2.5 per cent rise in their incomes, while “young families . . . [find] it difficult to make ends meet.” Tim Montgomerie has argued that there are “no good non-electoral reasons to continue to redistribute from the working population to retired people but that is what the Tories’ triple lock does.”
The only way that Government can achieve a welfare system fair to working people is by looking at social security as a whole. The Chancellor is right to link pensioners’ income to earnings while also offering protection against inflation. But as Reform’s recent report, Updating uprating: towards a fairer system, argued, this objective can be achieved by replacing the triple lock with a relative earnings link. This would peg the State Pension to a proportion of wages in the medium term. Reform calculates that this could save £21 billion over the next five years.
These savings would allow the Government to rebalance the system towards working-age recipients. The Government could cancel the planned freeze and replace it with a more appropriate measurement of uprating, one that better reflects benefit recipients’ experience of inflation than the Consumer Price Index. This package of reforms – replacing the triple lock with the relative earnings link and introducing a more appropriate uprating index for working age benefits – would save £8 billion over the course of the parliament. This would give the Chancellor some headroom to mitigate the impact of the Tax Credit cuts.
The welfare reforms of the last Parliament were broadly popular, but the Conservative Government risks losing that support if it continues to hit working-age families. It should bite the bullet and abandon the triple lock, and use those savings to create a fairer and more sustainable welfare state.