Miriam Cates: The pension triple lock is indefensible

Miriam Cates is the former MP for Penistone and Stocksbridge.

At last week’s Conservative Party Conference, I took part in a debate on reforming the welfare state hosted by the TaxPayer’s Alliance. Having made the case to a mature audience that the state pension is no longer affordable in its current form, I was expecting some tough questions.

Sure enough, an older gentleman stood up, took the microphone and explained how he had worked hard all his life, paid thousands of pounds in tax and had built up a substantial private pension worth over £700,000. He then went in for the kill, asking me if I thought he should keep his entitlement to the state pension.

It’s the scenario every politician dreads. Forced to choose publicly between honesty and popularity, it is perhaps unsurprising that such direct questions often induce cringeworthy attempts to avoid giving a straight answer. Fortunately, I am no longer a politician so faced no such dilemma. “No”, I told the gentleman, “You ought not to be entitled to the state pension; it should be means tested.”

Politicians, commentators and policy makers should be having this discussion in public. No serious person believes that Britain’s pensions bill is sustainable. On average, while GDP has grown by around 100 per cent since the turn of the century; pension spending has increased by over 200 per cent in the same period and last year accounted for £150bn of public spending.

The UK has not had a balanced budget in 25 years; in a conservative estimate, the OBR anticipates that, on the current trajectory, Britain’s debt burden will skyrocket from around 100 per cent of GDP to 270 per cent by 2070. Very obviously that is not going to happen; UK plc will be bankrupt some time before then. If we want to avoid economic disaster, Britain’s leaders need to find some urgent and radical solutions.

The left still labours under the Robin Hood delusion, believing that our fiscal chasm can be breached with tax raids on the ‘rich’. Yet with the top ten per cent of earners now responsible for 60 per cent of income tax receipts – and willing and able to flee the country -that particular well has run dry. The only way tax rises could come close to plugging the gap would be to increase the basic rate of income tax: a 5p hike on the basic rate of tax would bring in an additional £35bn a year; raising the additional rate by 5p (currently 45p in pound for incomes of over £125 000) would net just £0.8bn.

But with inflation so high and housing so expensive, not to mention the existence of a key manifesto promise, this is a political impossibility. The only way to keep Britain’s bailiffs at the door is thus to cut government spending.

In their various policy announcements last week, the Conservatives rightly targeted working-age welfare payments for these cuts. Kemi Badenoch and her team announced a potential £23 billion of welfare savings, pledging to end benefits for non-citizens and scrap payments for ‘low level’ mental health conditions. This should be uncontroversial; no other country in Europe treats mental health and physical disability as equivalent when it comes to benefits (which is perhaps why no other country in Europe has had such a serious problem with growing numbers of physically fit working age people going on the sick).

But while a £23bn a year saving is a good start (and is £23bn more than Labour is offering) it is a drop in the ocean. Britain’s total welfare bill (including pensions) is currently £327bn a year and will balloon to £370bn by 2030.

The elephant in the room – and a political sacred cow – is the cost of the state pension. Spending on pension related benefits has more than tripled as a proportion of GDP since the 1950s. The ‘triple lock’, which so far maintains cross-party support, means that pension spending will continue to rise by at least as much as working age salaries each year, regardless of inflation.

(Pensions are also not the only age-related expenditure putting strain on the public finances; the rising cost of adult social care is bankrupting many local councils.)

The extraordinary increase in life expectancy since the Second World War is of course something to be celebrated. But this remarkable progress in human longevity was not anticipated when the welfare state was designed. Our current model was built for a different age, and it is a model that simply cannot survive such an enormous demographic transformation.

In 1945, life expectancy was just 65. Only half of people were expected to live long enough to claim their state pension. Those who did would, on average, receive it for just a few short years. Most people died after short illnesses, requiring limited and therefore low-cost treatment from the NHS. Contemporary economists calculated that the day-to-day costs of pensions and age-related healthcare could be met through a tax on the working population who, in time, would retire on the contributions of the next generation.

Yet while the public still widely believes that an individual’s national insurance contributions are ‘saved up’ in individual pots to be drawn from in retirement, this has never been the case in reality. Today’s pensions, healthcare, and social security payments are paid for directly by current taxpayers.

Had the facts of life expectancy, fertility rates, and healthcare costs remained the same, this ‘unfunded’ model might have endured. But in 2025, life expectancy has risen to 82 and many people claim the state pension for twenty years or more. While the proportion of working age people in the population continues to decrease, the number of over-65s is on the rise.

The taxes of fewer and fewer people must thus be stretched further and further each year. In the 1970s, there were four-and-a-half working age people for every pensioner; now that ratio has shrunk to three to one, and it will fall to two to one in my lifetime. The moral case for the state pension has become irrelevant; it is just a fact that it can’t survive in its current form.

The British pension model has also created generational inequalities. Though it is indisputable that many pensioners are poor and living on meagre incomes, the Baby Boomer cohort (born between 1946 and 1964) is, as a whole, the wealthiest generation that has ever lived. Through an accident of birth, Boomers have reaped the rewards of unprecedented asset (house) price growth thanks to economic liberalisations, and benefit from generous pension and healthcare guarantees that were locked in before the increase in life expectancy was anticipated.

Meanwhile young people can’t afford to buy houses because of that same asset price inflation and are forced to part with painful amounts of tax to fund retirees in full knowledge that they themselves will never receive such support. This financial squeeze is making it difficult for the younger generation to afford to have children of their own, further shrinking Britain’s future tax base. Pensioners are now around half as likely to live in relative poverty as working age adults.

In this context, it is difficult to justify continued universal entitlement to the state pension. All other income-support benefits are means tested; to qualify for Universal Credit for example, you must have a sufficiently low income for your household size and savings of less than £16 000. Some benefits are tapered: in a family with dependent children, if one parent has an income of over £60,000, child benefit is withdrawn at the rate of five per cent for each additional £1000 of income, until the entitlement disappears once earnings hit £80,000.

Yet no matter how high a person’s income in retirement – from private pensions, investments and earnings – they are entitled to the full £12,000 a year state pension. At a population level, therefore, the state pension is now a cash transfer from the (generally poorer) working age people to the (generally richer) over-65s.

Some will argue that the state pension is contributory and therefore those who have paid in have the legal right to withdraw it, regardless of their financial circumstances. But the state pension is only contributory in the most rudimentary sense. In order to qualify, one must have paid national insurance contributions for 35 years, or claimed child benefit in lieu of NI.

But unlike for private or employer pensions, with the state pension there is no connection at all between how much is paid in and the amount someone can claim. Whether an individual has contributed a few hundred pounds or a few hundreds of thousands of pounds, all receive the payment in old age. The state pension is to all intents and purposes an age-related Universal Basic Income.

One million British pensioners pay the higher or additional rates of tax, meaning they have incomes of over £50,000 per year. By 2028, this figure will have reached three million; the taxpayer will be spending £36m each year topping up the incomes of some of the wealthiest people in Britain.

Saving even part of this sum – perhaps by tapering the withdrawal of the state pension in the same way as the higher income child benefit charge – would make a material difference to the public finances. Of course, means testing would introduce cliff edges and perverse incentives at certain points of the income scale, as it does for all benefits and tax rates. But what’s the alternative?

In the long term, there is an alternative to our current unfunded pension model, though it can’t be implemented quickly. All Western countries are grappling with the costs of aging, but some – such as the Swiss –  have state pension systems that are both better funded through investments and do not require intergenerational wealth transfers. For young people entering the workforce now, we should begin to implement a similar model, and beef up workplace pensions.

The welfare experiment of the last 70 years has left many in Britain with the expectation that the state is responsible for providing us with an income. This experiment has failed, leaving us heavily indebted and undermining the role of the family which used to be an individual’s primary source of support. In due course, we need to return to a model where we rely on ourselves and our families from cradle to grave, with neighbours, charities and churches stepping in to help and the state providing only a temporary safety net for those in the most dire circumstances.

To retrace our steps back from entitlement to responsibility may take a generation. We might be forced into such a transition sooner than we think by a fiscal crisis. But the bond market wolves are already at the door, and we must reduce spending right now.

Politicians must have courage to propose substantial reforms to the state pension, starting with means testing and ending the triple lock. Politically, this will be hardest for the Conservative Party, the vast majority of whose dwindling numbers of voters are over the age of 65.

Yet the responsibility for addressing this challenge does not only fall on politicians. To those Boomers who can do without the state pension and would prefer to see the next generation flourish, why not consider sending it back to HMRC? And while you’re at it, why not write to your MP, and encourage them to think the unthinkable.