Ditching the state pension triple lock in favour of a ‘double lock’ is unlikely to save the government money, according to a new policy paper from the Pensions Policy Institute.
It recommends opting for a smoothing mechanism instead, to ensure the cost of State Pensions do not rise significantly in 2021, if the economy recovers and there is a spike in average earnings. It says this could save the Treasury around £15bn in that year.
However it says this if this is a short-term measure only it shouldn’t impact pensioner wealth over the longer term.
There is concern that average earnings will fall sharply this year, although pensioners are likely to be protected as their income will rise by whichever is higher: price inflation or 2.5%, under the terms of the triple lock.
However if there is a spike in earnings inflation the following year, this would mean a large increase in the state pension – at a time when average earnings might only recovering to pre-Covid levels.
A double lock essentially pegs the state pension to either average earnings or price inflation. This has been used in the past.
The PPI says a smoothing mechanism may work better than a double lock, but it points out that this may require changes to legislation, or to the definition of earnings.
The PPI adds that government needs to weigh up the potential political consequences of breaking a manifesto promise to stick to the triple lock against the potential savings.
Its paper explores the potential impact of these various options and concludes that pensioner incomes could expect to reach up to 31 per cent of national average earnings by 2040 under a triple lock, and up to 30 per cent of earnings under a double lock.
If smoothing was used for one year, followed by the triple lock this would see pension income rise to up to 29 per cent of national earnings.
Quilter head of retirement policy Jon Greer says:“The triple lock has worked well in reversing the relative decline in the state pension so that it has made up much of the ground it had lost relative to earnings during the 1980s and 1990s.
“However, once the furlough scheme ends later this year and if wages recover, the current triple lock will provide a considerable boost to the level of state pension at a time when many are out of work and the government struggles to control the deficit.
“This is untenable both in terms of its fiscal sustainability and intergenerational fairness.”
He adds: “Despite a pledge to maintain the triple lock in his government’s election manifesto, there needs to be flexibility in the short term to prevent any artificial increase in the state pension. This short-term quirk in the system could mean that the triple lock is high on the Chancellor’s list of fiscal changes when he sets out his recovery Budget in November.
“A long-term solution is required to recalibrate state pension incomes if the triple lock is to be removed. This could include proposals to replace the triple lock with a ‘smoothed earnings link’ to provide a link to long-term wages while offering protection in periods of high inflation.”
Greer adds that there are a range of options for uprating the state pension sustainably over time. But he says that maintaining the triple lock in its current form “is simply not an option”.