16 Jul 2020
The economic hits just keep coming don’t they! As inflation falls, Chancellor Rishi Sunak is being warned that the state pension triple lock will become unaffordable.
The triple-lock is a policy device that was introduced in 2011, and what the triple-lock does is, it makes sure that the state pension rises each year, measured by CPI, average earnings, or 2.5% - whichever is higher. So basically, it means that the state pension is going to rise by a minimum of 2.5% a year irrespective of how earnings or inflation has risen over that year. The reason why the triple-lock is such a ‘hot potato’ is because over the recent years it has meant that pensioners have enjoyed much higher rises in their incomes than the rest of the population on working age benefits. For example, in April because of the triple-lock, the new and basic state pension rose by 3.9% because of the link to average earnings.
In contrast, most working age benefits, including job seekers allowance, child benefit and housing benefit, only rose 1.7% this year – this is because it is linked to inflation, to CPI, and is not triple-locked. So, it is clear that this is where the source of the tension is emanating from. Because of this, pensioners are getting bigger increases in their pensions, and the state pension is paid for by the younger working age population. Going forward with the huge bill the UK is now facing from the coronavirus, it is raising real questions about the ongoing affordability of the triple-lock common state pension.
So why does the Chancellor have it in his sights, and why might it save the Treasury?
First a bit of background. There is a lot of debate surrounding triple-lock and the reasons for keeping it. It was initially put in place because the state pension had taken a low-level dive by 2010. Since inception, it has increased the state pension and is the main reason why it has been kept in place. Politically, it has been very difficult for the government to abandon triple-lock and move over to something that could prove cheaper in the long run.
In 2017/2018 a long-term forecast showed the cost of triple-lock would be around £20 billion a year. That is largely due to the fact that people are living longer. And up until last month, Prime Minister Johnson had said “We’re not going to break our election commitments.” And one of those commitments last year was to keep the triple-lock in place.
The game-changer now, however, has been coronavirus and the impact it is having and going to have on wages, which may mean the state pension could rise by 15-18% in the next couple of years. The reason this might happen or rather the unique situation that the Chancellor is facing today, is because the state pension is linked to wages. With so many out of work and the introduction of the furlough scheme, wages could artificially rise by 18% over the next few years as the ‘artificial job retention’ scheme ends.
Chancellor, Rishi Sunak has been eyeing up options for reforming the costly measure with Treasury insiders – estimating a saving of £8 billion per year. The government will undoubtedly argue that no-one could reasonably have expected the coronavirus and the shutdown of economies, (which is partially true) however provision for scenarios such as financial meltdowns, wars, natural disasters, should have been built into the original policy as a matter of course.
If, as some fear, the UK does not thrive outside the EU and UK pensions and investment incomes freeze or fall at the same time as the GB pound declines (gently or sharply) against the euro and other currencies, what will the UK government’s attitude be then? ‘Tough? You made your bed and now must lie on it’? Will there even be enough left in the UK kitty after Covid-19 to help pension-age ex-pats even if there is a desire to assist them? We’ll just have to wait and see.
Until then, the dilemma is… will they go ahead and break the pledge, pay… or find another way?