Governments globally have spent a great deal of money to contain the worst economic fallout from Covid-19. Now they’re wondering how to keep the public finances under control.
The last thing the UK government needs right now is a massive increase in one of its biggest bills – the state pension.
So it’s little wonder that there’s a lot of talk this week of chancellor Rishi Sunak putting a halt to the “triple-lock” on the state pension – even if it means breaking a manifesto pledge.
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So what is the “triple lock” and will it be scrapped for 2022?
What is the triple lock and why was it introduced?
The triple lock pension is the formula by which state pensions are set each year. Currently, state pensions rise in line with either the cost of living (as measured by the annual change in the consumer prices index – CPI); the change in average earnings; or 2.5% – whichever is highest.
These three factors are known as the triple lock. It was introduced by the Conservative/Liberal Democrat coalition in 2010 and was intended to act as a guarantee that pensioners’ purchasing power never gets eroded by higher living costs.
Given the relatively low levels of inflation since then, pensioners have enjoyed significant “real” terms increases in their pensions – which is one factor that has helped to drastically reduce the number of pensioner households living beneath the poverty line.
How has Covid-19 made the triple lock controversial?
Maintaining the triple lock until at least 2024 has long been a key Conservative manifesto promise. But while the Conservatives have wanted to honour that pledge, statistical oddities related to the Covid-19 shutdown and recovery make that rather difficult.
Covid-19 resulted in millions of workers being put on furlough – reducing their wages while being able to keep their jobs. Then, when the economy started to reopen, many of those who were furloughed returned to their old jobs or sought new ones.
One result of this is that the rise in wages for this year has been artificially inflated.
The most recent reading for average earnings growth from the Office for National Statistics (ONS) found that headline wages were growing by more than 8% a year. However, in most cases, earnings haven’t increased by anything like that much – the number is simply being inflated by people coming back to work. The ONS reckons that actual wage growth is more in the range of 3.5% to 4.9%.
How likely is it for the triple lock to change?
If it is up to Sunak then there is a high chance the triple lock may be lifted, as the chancellor has clearly signalled he is willing to break the manifesto promise, due to numbers being grossly inflated because of the pandemic.
There is certainly nothing to stop him. Politically, it could prove unpopular – although at the same time, given the unusual circumstances and the fact that we’ve racked up a lot of debt during the pandemic, it shouldn’t be difficult to explain why boosting the state pension by 8% based on faulty statistics is probably not the best use of public money.
As Julian Jessop, economic adviser to the Institute of Economic Affairs think tank, points out, each percentage point increase will mark a £900m rise in annual spending on state pensions.
Forecasts by the Office for Budget Responsibility indicate that upholding the triple lock promise for next year would increase state pension spending in 2024-2025 by £6bn more than if it rose at the pace of inflation.
What’s next?
It looks as though the government will announce its decision later this week, alongside its ideas on paying for social care – we’ll cover both topics when the news is confirmed, but it looks as though the state pension is most likely to rise by inflation or 2.5%, rather than the artificially inflated earnings figure.
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