This week, over 12 million pensioners saw their state pension rise by up to £575 a year, as the weekly payments increased by 4.8 per cent under the triple lock guarantee.
The guarantee, which ensures the state pension rises by the higher of inflation, average earnings growth, or 2.5 per cent each year, has been the source of much debate since it came into place in 2011.
Many have put forward suggestions on how to change the triple lock although others look to keep it. Last week, Reform UK committed to continuing it if the party wins the next general election, despite previously hinting that it could look at removing it.
The fiscal reality is that the triple lock is deeply expensive, with its annual cost estimated to reach £15.5bn by 2030. Some suggest replacing the mechanism with a single link to either inflation or earnings growth – but this sort of move could be difficult, given pensioners are a large voting block.
And so a halfway house solution – that moves to break the lock but still shows a commitment to keeping pensioner incomes high – may have to be the answer to the conundrum.
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This solution could involve a political party linking the state pension to either inflation or earnings growth, but committing to reviewing and raising the payment to above this rate on an ad hoc basis, when necessary and when the public finances allow.
One of the reasons why the triple lock costs so much, is that inflation hikes are often followed by earnings hikes the following year. Workers often receive small pay rises immediately when inflation spikes, and then see their wages rise the year after to compensate. In this scenario, pensioners get two boosts to their income.
The years 2023 and 2024 demonstrate this problem perfectly. In September 2022, inflation spiked at 10.1 per cent – which state pensioners saw their income rise by the following April – whereas average pay growth was just 5.5 per cent.
The following year, however, earnings spiked to 8.4 per cent, as inflation fell to 6.7 per cent.
Workers saw pay growth of 5.5 per cent and 8.4 per cent. The second rise was to address 10.1 per cent inflation the year before, but pensioners got the second hike of 8.4 per cent even though they, unlike workers, had already seen their payments uprated inline with inflation.
Essentially, the lock gives pensioners the best of all worlds, which others don’t get.
On the flipside, linking pensions to just one of the two main elements of the triple lock – earnings growth or inflation – could come with issues too. For example, if earnings growth is above inflation for years and we raise pensions only with inflation, then pensioners’ incomes start to lag behind everyone else’s.
That’s why committing to a single link as a default, but promising to go above this when needed and when finances allow, would give politicians greater control over the welfare bill.
At the moment, a blind commitment to the triple lock means that its cost is ever increasing, with little means of estimating how great this increase will be from one year to the next.
Moving to a single lock, with room to manouvre, means that politicians could avoid implementing the lock when it is very high – such as in 2023 and 2024 – but maintain the option of doing so when it is affordable, or needed.
Politicians will still be accountable to the electorate – the reaction to, and subsequent u-turn on the means testing of the winter fuel payment shows that when politicians try and make conditions worse for pensioners, they will feel it in their polling – but they will maintain more control over their decisions.
This could easily be combined with a commitment to keep the state pension at a certain level, relative to earnings in the long run.
Again, this would preserve the value of the payment – politicians would be judged harshly if they reneged on their commitment – while avoiding being beholden to economic quirks that send the state pension flying up certain statistical releases.
It seems like a no-brainer – but it remains to be seen if anyone is brave enough to take the political risk in implementing it.