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29 June, 2020 Open access

Wages element of pensions triple lock will lead to ‘outsized’ growth of state pension over next two years, Resolution Foundation warns

New report says this year's slump in wage growth due to coronavirus, and expected significant increase next year, will lead to increase at three times faster than prices at annual additional cost of £3bn

The wages element of the pensions triple lock will lead to ‘outsized’ growth of state pension over the next two years, the Resolution Foundation has warned.

In a report on the triple lock - that sets state pension increases each year by the highest of earnings growth, inflation and 2.5 per cent - and the impact of volatile wages growth as a result of the coronavirus (COVID-19) epidemic, the Foundation says the next two years look set to provide a case study in why the triple lock is not a sensible mechanism for pensions uprating.

It highlights that the temporary impacts of the COVID-19 lockdown are set to drive nominal earnings down this year (estimating the year-on-year change in the triple-lock-relevant May-July period will be a fall of 3.3 per cent), before rising sharply next year (by around 5 per cent), which will equate to a 7.6 per cent growth in state pension under the triple lock -

'... this 7.6 per cent figure is more than three times the growth in prices (2.5 per cent) or earnings (1.5 per cent) over the two years. While these may seem like small margins, they have non-negligible effects on public spending. The 7.6 per cent growth in the state pension between April 2020 and April 2022 will mean spending £3 billion more in 2022 (and every following year) than if the state pension had kept pace with earnings over this period, and £2.1 billion more than if it had kept pace with inflation.'

In addition, the Foundation says that this ‘outsized’ growth in the state pension would take place alongside much slower growth in working-age benefits. With the £20 per week uplift to the main rate of universal credit and tax credits due to expire in April 2021, the Foundation expects most working-age benefits to be only 5 per cent higher in April 2022 than they were in April 2019, compared to an 11.8 per cent increase in the state pension over that period.

To address these problems the Foundation argues for changes to the triple lock -

‘… at a minimum, the government should temporarily switch to operating the Triple Lock over the coming two years as a whole, with the state pension rising by a 5 per cent backstop. This will exceed two-year growth in earnings or inflation.

A better approach would be to permanently uprate the state pension via a ‘smoothed earnings link’. This would see long term growth in line with earnings, but with temporary protections for years when price rise faster than earnings.’

Commenting on the report, Laura Gardiner, Research Director at the Resolution Foundation, said -

'The Triple Lock was announced a decade ago as a long-overdue move to restore the link between the state pension and earnings. But while that aim may be laudable, the policy itself is a mess and needs to be replaced.

As a result of the volatile earnings growth that the lockdown has driven, the triple lock will see the state pension increase by 7.6 per cent between 2020 and 2022. That is at least three times the expected increase in prices or indeed wage rises that workers are likely to see.

Such a large increase is particularly hard to justify when it will be working-age families feeling the greatest pinch from Britain’s jobs crisis.

The government should scrap the triple lock and move to a much clearer policy of setting a clear objective for the value of the state pension, and then holding it there via a smoothed earnings link.'

For more information, see Triple Lock risks the State Pension rising three times faster than prices or earnings - and outpacing working-age benefits yet again.