Calls are growing for the UK government to scrap the triple lock on state pensions, with experts warning pensions will rise five times faster than earnings because of the coronavirus pandemic.
The ‘triple lock,’ a key Conservative policy over the past decade, guarantees that state pension values will increase by the highest of average wages, prices, or 2.5%.
A think tank predicts it will push pension payments up by 7.6% between 2020 and 2022, far outstripping expected average earnings growth of 1.5%. It would also rise three times faster than expected price trends, with inflation forecast at 2.5%.
The Resolution Foundation said in a new report a “volatile” period for earnings would automatically spark the leap in pension values under the triple lock.
Average incomes are expected to decline this year before rebounding next year, reflecting the crippling impact of the coronavirus lockdown on household finances.
Many companies have slashed staff, pay and use of freelancers, with 3.2 million people claiming universal credit since the lockdown and millions more reliant on government schemes covering only 80% of their earnings.
The think tank’s analysis of Bank of England forecasts suggests pay levels are down 3.3% year-on-year for the three months to July, the start of the period used to determine pension increases.
But the economy is expected to gradually recover and pay levels to rebound 5% by the same period next year, the highest growth in two decades but partly offset by the previous year’s significant declines.
The triple lock means pensions will not reflect the earnings decline, rising 2.5% next year, but will reflect the earnings leap, jumping 5% the following year.
It will cost the government £3bn more than if prices kept pace only with earnings or £2.1bn ($2.6bn) if they kept pace only with inflation, according to the report.
“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,” said Laura Gardiner, research director at the Resolution Foundation.
She said working-age households had seen a squeeze on earnings and benefits over the past decade, amid a weak economic recovery from the last economic crisis and UK government austerity measures.
The main rate of unemployment benefits will have fallen by 18.9% by 2022, according to the think tank.
“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,” she said.
The think tank proposes temporarily tweaking the triple lock to reflect average figures over two years rather than a single year, limiting the distorting effect of the volatility in earnings.
But it ultimately believes the triple lock should be scrapped and replaced with a “smoothed earnings link,” allowing long-term growth in line with earnings.
A Treasury spokesperson said: “Decisions on tax and pensions policy are for the Budget but there are no plans to abolish the triple lock. This government will always look after pensioners.”