speri.comment: the political economy blog

The government is right on pensioner protection – but for the wrong reasons

Critics of the protection of pensioner benefit entitlements are playing into George Osborne’s hands

Craig Berry, Deputy Director at SPERI

Craig BerryThe politics of austerity appears to have induced an unfortunate amnesia among the British political class. For a long time the state pensions ‘earnings link’ was a totemic issue on the left – almost mythically so.  For her critics, Margaret Thatcher’s 1980 decision to index the payment of state pensions by inflation rather than earnings, which radically reduced the value of the state pension over time and led to a plague of pensioner poverty in the 1990s, was evidence of her government’s indifference to hardship and commitment to dismantling the state’s social insurance function.

In practice, earnings-based indexation had only become firmly established under Labour in the 1970s: it had not been part of the pre-war Beveridge blueprint for the state pension. Nevertheless, the restoration of the earnings link had emerged by 1997 as an important test of New Labour’s willingness to reverse Thatcher’s legacy.  Indeed, it ended up being one of the main reasons for the left’s distrust of New Labour, as Gordon Brown as Chancellor repeatedly refused to restore earnings indexation in order to enhance his credentials as a fiscal conservative (resulting in a controversial basic state pension increase of only 75p per week in 1999).

The Labour government did, eventually, promise in statute to restore the earnings link (the 2010 election happened before the deadline for restoration had been reached). It should also be remembered that, due to other reforms, pensioners were no more likely to be in poverty than anyone else by the time Labour left office – and for those who remained in poverty, the reason was often due to a failure to take up the means-tested benefits that Brown had made available. Moreover, the introduction of the state second pension had made the state pension system more generous and redistributive for future generations, irrespective of how it was indexed once in payment.

It is in this context that the Conservatives’ commitment to protect pensioner benefits has to be appreciated. Not only are pensioner benefits being spared the wider welfare axe, but the basic state pension (and soon the new single-tier state pension) is also protected by a ‘triple lock’ of indexation by inflation, earnings, or 2.5 per cent, whichever is higher.  Low inflation and sluggish earnings growth means that the percentage guarantee (which was actually first introduced by Brown) has been applied frequently, leading to the state pension comprising a much higher proportion of the welfare bill in recent years (a £7 billion rise in pensioner benefit expenditure since 2010 has offset in entirety the reduction in spending on working-age benefits).

The criticism now frequently heard – from both left and right – is that protecting pensioners from austerity makes the cuts worse for everybody else. There is a degree of truth to this; the triple lock is a pre-2010 election pledge that George Osborne clearly now regrets (he frequently lets it be known that he is considering removing this protection, presumably to test the likely reaction).

This perspective can be seen as a well-intentioned attempt to spare working-age groups from the impact of austerity. Yet it suffers from three major flaws.  Firstly, it essentially accepts the logic of austerity, namely, that it is to correct to cut social security, with the job of the left reduced to ensuring that austerity is doled out evenly.  Austerity is a micro-level tragedy for many individuals and families, but it is also a profoundly flawed macro-economic agenda.  In other words, we should be as concerned about the wider economic impact of any benefit cuts as we are about how the cuts are targeted.

Secondly, this perspective also misunderstands why Osborne et al. have sought to spare pensioners.  The explanation usually offered is the fact that older people are more likely to vote, and vote Tory (an argument made by both The Guardian’s Jonathan Freedland and Polly Toynbee recently). We should certainly not discount the possibility that the Conservative Party, like any other party, seeks to serve the people that vote for it (hardly a controversial circumstance in a representative democracy!). But it’s still a rather crude argument.  My research with Richard Berry, and research by Ben Baumberg and Peter Taylor-Gooby, shows that younger people strongly and consistently support the prioritisation of pensioner benefits within public spending.

Moreover, my forthcoming report for The Intergenerational Foundation (co-authored with Tom Hunt) on the intergenerational democratic deficit shows that the tendency of older people to vote for the Conservatives has a relatively limited electoral impact once the UK’s first-past-the-post system is taken into account. The Conservatives do amass support among older people, but in constituencies they would usually win anyway.

The more compelling explanation for the Conservative policy of protecting pensioners is that those in retirement are not really the targets of austerity. As I argue in my forthcoming book Austerity Politics and UK Economic Policy, austerity is much more about transforming behaviour at the individual level than it is about reducing public spending.  As such, its applicability to retirees is more limited, due to the impracticality of mobilising older people into employment by way of reducing ‘welfare dependence’.  Cutting pensioner benefits could only be legitimised by the deficit reduction objective, rather than behavioural change – and, as such, given the self-defeating nature of deficit reduction, it would be much more difficult to justify.

Thirdly, this perspective overlooks the many ways in which older people are suffering as a result of austerity. Older (poor) people are the principal victims of eye-watering social care cuts at the local level. Threatened cuts to Attendance Allowance (technically a disability benefit rather than a pensioner benefit) will create severe hardship for many older people. In addition, future pensioners will be much worse off under the single-tier state pension than under Labour’s two-tier system, a circumstance which highlights the limitations of assuming that only current pensioners are affected by pensions policy.

Perhaps most importantly, the Conservative/Liberal Democrat coalition government’s cuts did target a specific sub-section of the older population: the soon-to-be pensioners.  Rapid increases in the state pension age mean that people who are already very close to retirement will have to wait much longer before they are able to receive pensioner benefits, significantly reducing their lifetime entitlement to benefits by many thousands of pounds.

The key difference is that soon-to-be pensioners can, according to the underlying behavioural logic of austerity, justifiably be treated as people who should be working rather than shirking – despite mounting evidence of the impact of disability on poorer, older people’s ability to work beyond their mid-60s.

One of the tragedies of the election of radically right-wing governments – usually under-appreciated at the time – is how they manage to drag popular opinion to the right too, even among those who consider themselves left-wing. We are clearly witnessing a version of this story in the UK at the moment, as demands to remove pensioner protection both shield from view the significant cuts that poorer and future pensioners are experiencing or will experience as a result of government policy, and serve inadvertently to reinforce the logic of austerity.

Pensioner benefits should, generally speaking, be defended as a shining example of social insurance in action, a principle that legitimises the continued existence of a collectivist public realm, anchored by the state. That George Osborne has been cornered into supporting this position is a welcome sign of his fallibility.

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Categories: Austerity, Politics and policy, SPERI Comment, Tax, Welfare | Tags: , , , , , | Leave a comment

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