The respected thinktank’s newly-published paper The future of the state pension says the triple lock results in unpredictable and sometimes overly generous increases to the state pension.
The triple lock is a system of increasing the state pension each year by inflation, wage growth, or 2.5%, whichever is higher. The state pension will rise by 8.5% next April, in line with wage growth.
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The IFS also argues that increasing the state pension age to compensate for the expense of the triple lock is unfair to those with lower life expectancy who tend to be poorer.
It urges ministers to review the state pension so that it “provides a basis for financial security in retirement and ensures the state pension has a sustainable long-term future”.
Carl Emmerson, deputy director at the IFS, comments: “The current state pension system, and especially the new state pension, has much to commend it, but a number of challenges remain. In particular, the ageing population leads to uncertainty around the long-term sustainability of the system. A new way forward is needed to ensure that people can have confidence and certainty over the state pension.”
Due to ballooning costs and a sense that large state pension increases can be unfair, there is speculation every year over whether the government will honour its triple lock commitment - not least because sometimes it does tinker with the system to save money.
The IFS paper suggests a “four-point pension guarantee” to replace the triple lock and also offer certainty over future increases to the state pension age - we look at the details, and whether it would work in practice.
A new state pension guarantee
The IFS recommends scrapping the triple lock. Instead a “four-point pension guarantee” would give certainty over what pensioners should expect to receive. The four points are:
- There is a target level set for the state pension expressed as a share of median full-time earnings – for instance a third. Once it reaches the target, increases in the state pension will in the long run keep pace with growth in average earnings, which ensures pensioners benefit when living standards rise.
- Both before and after the target level is reached, the state pension will continue to increase at least in line with inflation every year.
- The state pension will not be means-tested.
- The state pension age will only rise as longevity at older ages increases, and never by the full amount of that longevity increase. The government will write to people around their 50th birthday stating what their state pension age is expected to be. This age would then be fully guaranteed 10 years before they reach it.
Heidi Karjalainen, a research economist at IFS and author of the report, says: “A commitment by the government to a set level of the new state pension relative to average earnings would ensure pensioners continue to benefit from higher state pensions as living standards rise. Under our suggested guarantee, they would also be protected from falls in their purchasing power when inflation is high or earnings growth is very weak.”
Compared with increasing the state pension in line with average earnings, the thinktank projects that – on its own – the triple lock could “easily cost anywhere between an additional £5 billion and £40 billion per year in 2050 in today’s terms.”
Should the triple lock be scrapped?
Many experts say the triple lock is unsustainable, and is fuelling an intergenerational divide as pensioner payments soar higher than wage increases.
Gary Smith, a partner at wealth manager Evelyn Partners, comments: “Fresh thinking on the conundrum of the state pension and the triple lock is always welcome and the IFS report provides lots of food for thought. It identifies some of the increases to the state pension under the triple lock as having been overly generous and fiscally unsustainable, and that is certainly arguable.”
However, he says changing the approach would take time, and “one easy step for the authorities to make the triple lock more sensible and perhaps less controversial would be simply to change the metrics that it is based on to give less volatile readings for inflation and average earnings”.
For example, the government could use an average figure for inflation rather than September’s rate of CPI inflation, and strip out bonuses from the average earnings growth figure.
Tom Selby, director of public policy at the investment platform AJ Bell, calls the IFS’s suggestions “sensible”. He notes: “It would certainly be a more coherent plan than the triple lock, which randomly ratchets up the value of the state pension depending on earnings growth and inflation at a specific point in time each year. Similarly, building greater certainty into future state pension age increases would help give savers confidence that the goalposts won’t be moved.”
Is the state pension enough to retire on?
While calls are growing louder to overhaul the triple lock, research by Interactive Investor reveals that living on the state pension alone is not enough to secure a basic standard of living in retirement.
This is despite seemingly large increases thanks to the triple lock - for example, the state pension shot up by 10.1% in April this year and will rise again next April by 8.5%.
Interactive Investor says that even after April’s increase, the state pension will still fall £2,643 short of the amount needed for basic retirement income. It says that for a basic standard of living in retirement, pensioners currently need £14,144 each year before tax.
Alice Guy, head of pensions and savings at Interactive Investor, comments: “Scrapping the triple lock would lead to millions of pensioners facing a poor old age, as the state pension is currently not enough for even the most basic of retirements.”
Ruth is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times.
A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service.
Outside of work, she is a mum to two young children, a magistrate and an NHS volunteer.
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