domingo, mayo 26, 2024

Coronavirus: Why the pension triple lock is back in the spotlight

Elderly couple watching TV Image copyright Getty Images

Financial pressure on the Treasury from the coronavirus outbreak has prompted more speculation over the level of future rises in the state pension.

At present, the state pension increases each year in line with the rising cost of living seen in the CPI measure of inflation, increasing average wages, or 2.5%, whichever of those three is highest.

This is known as the triple lock, and it is a Conservative manifesto pledge for the five years of this Parliament.

However, the technical aspects of state-paid wages during the coronavirus outbreak could lead to a big rise in the state pension if the government sticks to the current system.

How does the triple lock work?

Near the end of each year, the government sets the level of state pension to be paid from the following April.

The full, new state pension has amounted to £175.20 a week since April.

Most pensioners actually get the older basic state pension of £134.25 per week. They may also get a Pension Credit top-up.

Both the old and new state pension went up by 3.9% this year.

That was in line with the rise in average earnings (taken from official data from the previous May to July), which was higher than the other two elements of the triple lock, inflation (in September) and 2.5%.

Why is the triple lock a regular source of debate?

The triple lock has set the state pension level for each of the last 10 years.

The guarantee was introduced by the Conservative-Liberal Democrat coalition to ensure pensioners did not see any rise in their state pension being overtaken by the rising cost of living, nor that the working population would be see a much bigger income rise than them each year.

It has proved to be a very expensive policy.

Image copyright Getty Images

For example, the link to average earnings means the older, basic state pension is £13.45 week higher now than it would have been without this guarantee, according to calculations by pension consultants Willis Towers Watson.

So economists have argued that the triple lock has meant unfairly bigger rises in income each year for pensioners compared with, for example, the wages of young workers since the financial crisis.

Many charities representing the elderly argue the state pension is still relatively little to live on, and is still low alongside international comparisons.

Why will coronavirus upset the triple lock?

One reason is that the government already has a huge bill on its hands as a result of all the financial support it has provided for businesses and individuals. It will need to save some money, or borrow.

Just as significant is the state-backed wages programme – the furlough system – which sees the government paying the wages of nine million employees who cannot work as a result of the outbreak.

The government pays 80% of wages, up to £2,500 a month.

So, when this support unwinds and people receive 100% once more, if their job still exists, average earnings will record a big rise.

The Office for Budget Responsibility said this could amount to an 18% rise next year. In many ways, this is an artificial pay rise.

So, the recipients of the state pension would be protected from a link to the current fall in wages, as the triple lock means they must receive an increase of at least 2.5%, but then benefit from an 18% rise in line with wages the following year.

What happens next?

More debate should be expected.

While some leading economists expect at least a suspension in the guarantee and believe this is an opportunity to reassess the policy, the government has not been drawn to comment so far.

«Announcements on tax and pensions policy are for Budgets. The government is committed to supporting pensioners,» it said in a statement.