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The UK’s annual income growth figures released last week were significant not least because they were at 8.5%, the highest on record outside of the pandemic. The data point will also serve as a benchmark for increasing the state pension next April. The “triple lock” – in place since 2011 – means the government guarantees state payments to pensioners to increase each year by the higher of total wage growth, inflation or 2.5%.
It makes sense to protect the spending power of older people who receive a regular income from the state. Otherwise, the gap in spending power between these groups and those workers whose wages are more likely to be in line with the economy will widen. But how much protection pensioners should get is a political question.
According to the Financial Times, the Conservatives’ triple lock means the government now spends an extra £11 billion a year on state pensions, with increases in line with prices or incomes. Institute for Fiscal Studies. It could create a ratcheting effect, meaning that over time state pensions grow faster than work rewards, taking up an ever-increasing share of national income. In fact, state pensions in cash terms have risen by around 60% since 2010, while average earnings have risen by 40%.
That’s an unfair outcome for younger workers, whose wages have suffered amid economic volatility and slow productivity growth over the past decade. Before the triple lockdown, earnings growth typically outpaced inflation by 2.5%. The policy means shared prosperity, but the costs of economic stagnation are concentrated among younger people. However, pensioners make up a large portion of the electorate, making reform a political hot potato. The UK’s state pension is also low by international standards, despite having a more developed private system.
Nonetheless, the triple lockdown is unsustainable, especially as other demands for government spending increase. As the population ages, state pensions will surge to nearly 9% of UK GDP 50 years later. The IFS estimates that additional spending on state pensions could be between £5 billion and £45 billion a year by 2050. This huge range stems from the uncertainty around forecasting the triple lock variables, which is also hampering financial and retirement planning.
According to reports, plans to eliminate bonuses from this year’s profit calculations at least make sense. One-off payroll settlements in the public sector boosted earnings. The suspension of the triple lockdown last year was also necessary given the huge rise in incomes following the end of the UK’s Covid-19 furlough scheme. But the system needs more than just tweaks. It needs to be retired.
One option is to increase pension levels based solely on earnings growth. Because income is closely linked to productivity and tax receipts, this means that incomes for workers, pensioners and the government fluctuate as the economy develops. If inflation is significantly higher than wage growth, pensions may increase if political support outweighs other requirements. A callback mechanism Can be used in future years to avoid compounding effects. Any system that tracks earnings growth over the long term will be fairer and more fiscally sustainable.
Reform of the triple lock should extend to exploring how the private pension system can provide more support. For example, automatic enrollment into private pensions could be expanded to cover more workers to provide more independence from state pensions. The status quo needs to change to avoid the government falling into deeper fiscal trouble. It’s time to unlock the triple lock.
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