Intergenerational fairness - Estimates day debate, 28 February 2017

Overview

In its November 2016 report on Intergenerational Fairness, the Work and Pensions Committee said that the UK economy had "become skewed", placing the intergenerational contract under strain:

The UK economy has become skewed. Rapid and sustained rises in house prices have concentrated wealth in the hands of those who own property. Far too many young people cannot afford homeownership and instead have to pay costly private rent. Life expectancy has risen faster than anticipated at a time when the large baby boomer cohort, born between 1945 and 1965, are reaching retirement. As the taxes of working people support the retired, the ageing population places strain on those in work. Pensioners have been protected from public spending cuts that have largely been felt by younger groups. Pensioner poverty has been drastically reduced and average pensioner household incomes now exceed those of non-pensioners after housing costs. The millennial generation, born between 1981 and 2000, faces being the first in modern times to be financially worse off than its predecessors.

The welfare state has long been underpinned by an implicit social contract between generations. The provision of benefits and public services to the current pensioner population is funded by the taxes of the current working-age population. In turn they expect to receive similar benefits and services when they retire, and so on. The skewing of the welfare state has placed the intergenerational contract under strain. (Work and Pensions Committee, Intergenerational fairness, November 2016, Summary).

It made recommendations relating to the triple lock and universal pensioner benefits which, it said were "intended to strengthen the implicit contract between generations that is at the heart of our society." (Ibid)

In response in January 2017, the Government outlined its approach, which was to:

ensure economic security for working people at every stage of their life, including retirement. The Government supports people seeking to return to work, which is the best way out of poverty, and provide individuals with the opportunity to save for a secure retirement. (Intergenerational fairness: Government Response to the Committee's Third Report of Sessions 2016-17, January 2017).

Triple lock

The Committee recommended that the triple lock should be replaced by a "smoothed earnings link" from 2020:

5.We recommend the Government benchmark the new state pension and basic state pension at the levels relative to average full-time earnings they reach in 2020. The triple lock should then be replaced by an earnings link. In periods when earnings lag behind price inflation, an above-earnings increase should be applied to protect pensioners against a reduction in the purchasing power of their state pension. Price indexation should continue when real earnings growth resumes until the state pension reverts to its benchmark proportion of average earnings. Such a mechanism would enable pensioners to continue to share in the proceeds of economic growth, protect the state pension against inflation and ensure a firm foundation for private retirement saving. The new state pension and basic state pension it replaced would track average earnings growth in the long term. That is more fiscally sustainable and more intergenerationally fair. (Ibid).

In response, the Government confirmed its commitment to the triple lock for this Parliament. Regarding its impact:

7.The triple lock has been an invaluable element in addressing the issue of pensioners living in low income households, which peaked in the late 1980s at over 40 per cent. The proportion of pensioners living in low income is now down to 14 per cent.

8.As a result of the triple lock, the value of the full basic State Pension as a proportion of average earnings is at its highest since the late 1980s.

9.As well as the Triple Lock, this Government has successfully introduced the new State Pension which improves State Pension incomes for many lower earners and women; whilst putting it on a sustainable footing.

10.The latest data for the 2016 Autumn Statement shows that spending on pensioners as a percentage of GDP is falling: from 6.1 per cent in 2010, it is forecast to fall to 5.6 per cent in 2020.

For more detail, see Library Briefing Paper CBP-7812 State Pension triple lock (February 2017).

Universal pensioner benefits

On universal pension benefits, the Committee said there was "no case for future governments to contemplate any increase in the value or range of universal pensioner benefits. They should also not be off limits when spending priorities are set in future Parliaments." (Intergenerational fairness, November 2016, Summary). For more detail on the debate on the different benefits, see Library Briefing Paper SN-06354 Pensioner benefits (February 2017).

Information gap

The Committee was concerned that there was a dearth of reliable information to inform policy:

There is a dearth of reliable and comprehensive information about the intergenerational distribution of public and private resources. Greater awareness of the intergenerational implications of decisions would make for better informed policy. We recommend the Government make available the necessary information and resources to enable updated research estimating the balance of fiscal contributions and withdrawals by different generations over their entire lifetimes to be carried out. (Intergenerational fairness, November 2016, Summary).

The Government said it welcomed the work being undertaken by the Intergenerational Commission, would be happy to consider requests to support its work and looked forward to examining the results". (Intergenerational fairness: Government Response, January 2017, para 21-23).

Information about the work of the Integenerational Commission is on its website.