Theresa May is considering replacing the “triple lock”, which guarantees a minimum increase in the state pension each year, with a less generous “double lock” commitment in the Conservative party’s general election manifesto, and spending some of the money saved on social care.
What is the triple lock?
Introduced in 2011 by the coalition government, the triple lock guarantees that the basic state pension rise by a minimum of 2.5%, the rate of inflation or average earnings growth. Before 2011, the state pension rose in line with the retail prices index (RPI) measure of inflation, which was consistently lower than annual rises in earnings or 2.5%.
Has the triple lock made a difference to pensioner incomes?
The last few years – in which earnings growth has been extremely weak – have seen triple lock indexation boost the value of the state pension relative to both average earnings and prices. The Institute for Fiscal Studies (IFS) said in its recent assessment: “Between April 2010 and April 2016 the value of the state pension has been increased by 22.2%, compared to growth in earnings of 7.6% and growth in prices of 12.3% over the same period.” That means pensioners have seen their incomes rise at almost double the pace of the average worker.
How much has the triple lock cost the government?
The government actuary’s department calculates that this dramatic improvement has pushed the value of the basic state pension up to its highest share of average earnings since April 1988. Compared with an uprating in line with earnings, the increased benefit to pensioners cost an extra £6bn a year in 2015–16. It cost about £4bn relative to indexation to the consumer prices index (CPI) measure of inflation, over the period since April 2011. Most benefits are linked to CPI these days, which is estimated to be around 0.5% lower each year on average than RPI.
Why is the triple lock under attack now?
Ahead of the 2015 election, the Conservative government pledged to continue the coalition triple lock policy until 2020. But chancellor Philip Hammond and prime minister Theresa May are known to believe the rising cost means the Tory manifesto should revise the pledge to a double lock on the state pension that links increases to rises in earnings or inflation.
How will the exchequer gain should the Tories ditch the guarantee of 2.5% annual rises?
Forecasting rises in earnings and inflation from 2017 to 2060 is a tricky business. The Office for Budget Responsibility has a go in its regular reports on the sustainability of the government’s finances. Without the triple lock it says spending is projected to increase by 1.1% of national income between 2020–21 and 2060–61 (from 5.0% to 6.0%). This is equivalent to £21bn in today’s terms.
How does that compare to keeping the triple lock?
The OBR projections show a rise by 1.8% of national income over the same period (from 5.0% to 6.8%), which is equivalent to £35bn in today’s terms, or some £15bn more than under earnings indexation.
What happens if the government raises the age at which people qualify for the state pension?
At the moment the government plans to make people born after March 1961 wait until they are 67 before they qualify for the state pension age and those born after March 1977 retire at 68. A report by the former CBI boss, John Cridland, commissioned by the government argues that increasing life expectancy means everyone needs to work for longer. Ministers were considering his proposals for raising the state pension age to 68 between 2037 and 2039 (compared to 2048 under current plans) and to 70 by as early as 2057, affecting anyone born after 1987.
Are there other ways to reduce the pensions bill?
Mark Pearson, deputy director of employment, labour and social affairs with the OECD, the Paris-based think tank, told the Financial Times the UK should means test the basic state pension, which remains a universal benefit. “Giving less [pension] to the people at the top would free up resources to increase general benefits,” he said. Another proposal would be to tax pensioners based on income tax thresholds specially designed for people of pensionable age. This would allow all pensioners to benefit from state pension rises, but reduce the rapidly escalating inequality among the over 65s who have among the highest disposable incomes of all working people and yet fall under a system of income tax thresholds designed for working households.