Published On: Tue, Sep 8th, 2020

State pension: Keeping the triple lock unchanged is ‘not an option’ – will payments lower? | Personal Finance | Finance

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State pension payments will increase every year by whichever is the highest is of 2.5 percent, averaged earnings or inflation. However, it was reported in May that HM Treasury was considering moving to a “double lock” system to reduce the impact on the budget arising from the pandemic.

While this initially seems like it could reduce the financial burden on the state, a new briefing paper from the Pensions Policy Institute (PPI) found that changes of this nature would have a limited impact.

The PPI do acknowledge that moving to a double lock system could be somewhat beneficial in the long term, as the following comments detail: ”Under a triple lock, and different scenarios of inflation, the State Pension could cost between 5.8 percent and 6.6 percent of GDP in 2040.

“The cost could drop to between 5.8 percent and 6.3 percent of GDP in 2040 under a double lock.”

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They also summarised the following findings:

  • Dropping the triple lock in favour of a double lock will not necessarily save money on State Pension costs in the short-term.
  • A smoothing mechanism could ensure the cost of State Pensions does not rise significantly in 2021, saving up to 0.6 percent of GDP (around £15bn).
  • A smoothing mechanism may require changes to legislation, or to the definition of earnings.
  • The Government would need to weigh up the potential political consequences of breaking a manifesto promise, to drop the triple lock, with the potential savings.
  • Changing the State Pension inflation mechanism would mean that pensioner incomes do not increase as quickly.
  • Under a triple lock, average pensioner incomes could reach up 31 percent of national average earnings by 2040, compared to up to 30 percent under a double lock and up to 29 percent under smoothing for one year, followed by the triple lock.
  • The future cost of the State Pension is uncertain as changes in the economy and health trends are unpredictable.

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On these findings, Jon Greer, the head of retirement at Quilter, noted additional elements which need to be taken into account.

As he explained: “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.”

“Under this methodology, the state pension is set as a fixed proportion of wages.

“When wage growth lags behind inflation, the state pension will increase in line with prices until real earnings recover and the state pension would then revert to its benchmark proportion of average earnings.

“It is one of a range of options for updating the state pension sustainably over time.

“However, it is dependent upon determining a fair level at which to set state pension incomes as proportion of earnings.

“Maintaining the triple lock in its current form is simply not an option.

“The government should use this opportunity to carefully consider the merits of moving to a long-term solution so that pensioners share in the proceeds of economic growth, whilst protecting their income against inflation and ensuring intergenerational fairness”.



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