State pensioners probably aren’t going to get an 8% pay rise next year

The “triple-lock” could in theory mean an 8% rise in state pensions this year. But that’s not going to happen. Saloni Sardana explains what the triple lock is, and why the chancellor wants to scrap it.

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.  

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.

Recommended

The charts that matter: more pain for goldbugs
Economy

The charts that matter: more pain for goldbugs

Gold investors saw more disappointment this week as the yellow metal took a tumble. Here’s what’s happened to the charts that matter most to the globa…
18 Sep 2021
The new social-care levy: an unfair tax that protects the “assetocracy”
National Insurance

The new social-care levy: an unfair tax that protects the “assetocracy”

The government’s regressive social-care levy will make Britain’s tax system even more complex. Root-and-branch reform is long overdue.
18 Sep 2021
Kieran Heinemann: the history of shareholder capitalism
Investment strategy

Kieran Heinemann: the history of shareholder capitalism

Merryn talks to Kieran Heinemann, author of Playing the Market: Retail Investment and Speculation in Twentieth-Century Britain, about the history of t…
17 Sep 2021
Cryptocurrency roundup: litecoin blunder, cardano update and bitcoin mining in Laos
Bitcoin & crypto

Cryptocurrency roundup: litecoin blunder, cardano update and bitcoin mining in Laos

Saloni Sardana looks at the week’s biggest stories in the world of cryptocurrencies.
17 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021