The Conservatives are going to force a vote on Labours plans to cut the Winter Fuel Allowance next week. Some Labour MPs are going to rebel. Older voters are furious and some younger ones too.
Politically this is terrible so why are Labour cutting the pensioner winter fuel allowance? This looks exactly the wrong policy for Labour to be pursuing so early in office.
For a start they aren’t cutting it. They are means testing it, which isn’t quite as bad, but is still painful.
The reasoning behind it is simple.
In 2011 the then Conservative Government introduced the triple lock. This means the state pension increases every April by whatever number is highest out of inflation, the average UK wage increase, or 2.5%.
This was a nakedly political move by George Osborne to bind older voters to the Conservative party. In the 14 years since the triple lock was introduced, the state pension has risen in line with inflation 7 times, by 2.5% three times, and in line with earnings growth just three times. Pensions are rising much faster than wages.
This is also much faster than the economy is growing. Under Thatcher the UK economy grew by an average of 2.6%. Under Major this fell to 1.6%. It rose to just over 3% under Labour, but fell back after the credit crunch. It dropped to 2% when Cameron introduced austerity, and fell again to 0.9% after the Brexit vote (I excluded the Covid years otherwise it would have been much worse).
What this means is that pensions are increasing much faster than the economy is growing. There has been a redistribution of wealth from people who do work to people who don’t. This isn’t the only reason why the economy has stagnated for the last 8 years. But it is part of it.
Since the triple lock the state pension has risen by 64%. Prices have increased by 42%, but earnings have risen by less. Not only has there been a cash transfer from workers to retired, but pensioners have seen consistent increases in their standard of living, while everyone else’s has fallen. This has become much worse in recent years as inflation shot up, so bad that the triple lock had to be suspended in 2022 because it would have resulted in a 10% increase in pensions, when everyone else’s living standards were plummeting.
At the same time house prices have risen. Older people are more likely to be home owners than younger workers, and so they have benefited disproportionately from the increase. Again this wasn’t an accident; successive chancellors have stoked a house price bubble for political ends.
When Labour left power in 2010 there were 750,000 pensioners living in households with over £1m in assets. This isn’t quite the same as being a millionaire, but it is still well off.
Today there are 3.5m pensioners in £1m households. This is an unprecedented transfer of wealth. It doesn’t mean all pensions are wealthy, and some might be asset rich/cash poor. But it is a big sign of how imbalanced wealth distribution is. Money isn’t flowing down from older generations to younger, but flowing upwards from young to old.
Cuts to the winter fuel allowance while awarding pay settlements to public sector workers is a pretty blatant way of rebalancing the economy so that those who work get a bigger share, reversing the transfer of wealth that has taken place over the last 14 years.
It’s not what I would have chosen to do, and I think it is bad politics. I wouldn’t be surprised if the final policy is watered down a bit. Starmer and Reeves have a problem with empathy – they just don’t look like they connect with ordinary peoples lives.
But the economics behind it are pretty stark. At the current rate of growth in the economy we can’t afford the triple lock, unless we can get back to Tony Blair levels of growth, and much lower levels of inflation. You can’t afford pensions rising by 4% if the economy is only growing at 1%. No-one has had that difficult conversation with voters yet.
And if we want the economy to grow faster we have to find a way to give a bigger share of that growth to those who work. Wealth has to start and trickle down not flow up.
https://fullfact.org/economy/millionaire-pensioners