The state pension is, from next April, set to increase by more than £560 a year. This is due to the triple lock policy, which determines rises according to inflation, wage growth or 2.5 per cent – whichever is highest. Yet with the state pension already making up almost half of the Government’s benefits bill, just how much longer the triple lock can be sustained and what could replace it? The i Paper’s experts offer their perspective.
It has long been warned that the triple lock is no longer affordable, with the Office for Budget Responsibility (OBR) warning earlier this year it is set to cost £15.5bn by 2030 – three times more expensive than originally expected in 2011 when it was brought in.
There are many options that could replace the lock but perhaps one of the most popular is a smoothed earnings link, a proposal backed by members of the Institute for Fiscal Studies (IFS) and the Resolution Foundation.
Under this policy, the state pension would be linked to earnings but will also give the option to top-up pensions in periods of high inflation, as well as encompassing a claw-back mechanism to avoid compounding increases relative to earnings.
For example, when wages are lower than inflation, pensioners get a rise in line with inflation but when wages are higher than inflation, those on the state pension get this too.
It is a method to prevent large spikes in the state pension but also ensure that retirees are paid fairly.
Although perhaps more complicated to understand than a simple change to a double lock – removing the 2.5 per cent element – it is ultimately one of the fairest.
Grace Gausden is The i Paper’s money and business editor
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The easiest way to reduce the burden of the triple lock on the state pension is to keep it – but take a series of measures to contain the cost.
There are three things it could do to contain the cost. One is to follow Denmark and increase the state retirement age to 70. As other countries are likely to follow suit, this should become politically easier.
Next, it can promote more aggressively its present scheme that allows people to defer taking their pension in exchange for a higher payout later. It probably would not cut the overall cost to the taxpayer but it would improve the Government’s cash flow and since its headline deficit would improve, the markets would respond positively.
Third, and most important, it could do a number of things to keep older workers in some form of paid employment. These include mid-life coaching to support them, changes to employment legislation to discourage companies making older workers redundant, and tax changes to encourage people over the state retirement age to stay in work. Of course this is not for everyone, and it requires flexibility on both sides. But since there is evidence that staying in work keeps older people healthier, it’s a win-win for all.
Hamish McRae is an award-winning business and economics journalist. He writes a weekly column for The i Paper
A simple starting point for cutting the triple lock might be to get rid of the 2.5 per cent element, and turn it into a double lock.
This would mean that pensioners pay packets would still go up by the highest of inflation or average earnings growth every year, but in years when both figures are very low, they would not get a 2.5 per cent increase.
The 2.5 per cent figure is relatively arbitrary and there seems little argument for it being kept, but it’s dictated the increase to the state pension four times since the triple lock was introduced in 2011.
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Cutting it would be a way for a political party to signal that the lock is not untouchable, whilst also reasonably being able to argue they were giving those who get the state pension a good deal. They would still, over time, see their payments go up by higher than both inflation and average earnings.
This compares to working age people, who see most benefits increase only by inflation each year – and sometimes not even that.
Callum Mason is The i Paper’s deputy money editor
Ros Altmann: Reform National Insurance contributions
The news that state pensions will increase by 4.7 per cent has amplified calls to scrap the so called a triple lock. Commentators claim it is unaffordable, unsustainable and inter-generationally unfair, but its politically totemic status has made all political parties pledge to retain it. This is not a sensible way to run policy.
In a rational world, the Government would review the adequacy of state pensioner support regularly. This would presumably conclude that the 2.5 per cent part of the triple lock has no economic or social rationale but adds to long-term costs.
The state pension is the bedrock of our whole national insurance social welfare contract and of course it must be protected to ensure it does not fall way behind national increases in prices and standards of living.
But this could be done by ensuring annual increases in line with an average of inflation and earnings growth. Costs could also be controlled by making tax-free pensioner benefits taxable and by increasing the number of years of National Insurance needed for a full state pension from 30 years, which is nowhere near a full working life, to 40 or more. We need a proper review to achieve political consensus for pensioner support.
Baroness Ros Altmann is a Tory peer and pensions expert
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