Will triple lock state pensions survive the current economic crisis?
The Covid-19 pandemic has dealt a crippling blow to the British economy. The latest predictions from the Office for Budget Responsibility say that the country is on track to see the largest economic decline for 300 years, with output falling by at least 10% over 2020.
While the long term economic outlook is uncertain, the various economic support measures announced by the government will go some way to protecting it. For instance, the job retention scheme, where the government paid the wages of 6.3 million people, should prevent some of the fallout that would be caused by large scale mass unemployment.
However, all this needs to be paid for. For the first time in 50 years, government debt exceeds the size of the economy. Income from tax, National Insurance and VAT has plummeted while government spending has soared.
All this means that the state pensions triple lock could again come under the microscope. Under the triple lock system, state pension payments rise by the higher of inflation, wages or 2.5% each year. This policy has been a central part of the government’s commitment to pensioners over the last ten years.
Recently, experts have been increasingly vocal in their opinion that the triple lock will have to be abandoned in order to pay for the fallout of the lockdown. The Social Market Foundation think tank advised the government to scrap the triple lock system, calling for a double lock system where the state pension would rise in line with either average earnings or inflation. The think tank estimates that this would contribute to £20bn worth of savings over the next five years.
An added concern is that following this year’s fall in average earnings – predicted to be 7.3% – average earnings could then soar next year in the event of a sharp recovery. One estimate places this figure at over 18%. This figure would form the basis of the earnings element of the triple lock system for 2021 and 2022, meaning that state pensions could rise by over 21% in just two years.
This kind of increase would be unsustainable, especially given the severe hardship that millions of workers will face over the next few years.
However, the triple lock pension scheme was a key part of Johnson’s manifesto, a commitment he reaffirmed in parliament back in May.
What’s more, there are some models of the country’s economic recovery which show a more restrained recovery than the one mentioned above.
Under the Office for Budget Responsibility’s latest prediction for a “moderate” recovery, the triple lock would only see earnings rise by 5% next year, meaning that state pensions would also rise by 5%. This is a far more prudent figure than 18%, meaning Johnson could still find traction to stick with his triple lock pledge.