The year 2022 could be a bumper payday for those receiving the state pension. Based on current trends, pension payments are expected to rise by around 8% from next April. That’s because the ‘triple lock’ guarantees that the state pension will rise each year in line with the highest of earnings, inflation, or 2.5%.

Since the spring and summer of 2020, earnings have rocketed as more people have come off furlough, and the latest figures show that total pay increased by 8.8% in the last year. Not everyone is rejoicing however, and the high level of earnings growth has led to calls to abandon the triple lock.

STATISTICAL ANOMALY

That’s partly because the growth in earnings is really a statistical quirk, stemming from the widespread use of the furlough scheme last year. Millions of people have gone from receiving 80% of their wages to being paid in full once again, and that’s artificially pushed up earnings growth.

There aren’t too many people out there who have genuinely been handed an 8.8% pay rise over the last year. It also doesn’t look that fair to be distributing such a bumper pay rise to pensioners, while many younger people have lost their jobs as a result of the pandemic, particularly when you consider that restrictions were mainly put in place to protect older generations from the devastating effects                 of Covid-19.

There’s also a big question over the cost of such an increase to the public purse. The OBR reckons that a 1% rise in the state pension equates to around £900 million of extra spending for the Treasury, so an 8.8% rise adds up to a pretty substantial extra bill for the Exchequer. This clearly comes at a time when the chancellor is trying to repair the nation’s balance sheet after spending huge sums of public money fighting the coronavirus. On the face of it then, it seems difficult to justify maintaining the triple lock. But as ever, there are two sides to the story.

WHY THE TRIPLE LOCK WAS INTRODUCED

From 1979, the state pension was increased only in line with prices, rather than earnings which led to the infamously derisory 75p increase in April 2000. The backlash prompted the then chancellor, Gordon Brown, to introduce a 2.5% minimum on annual increases.

But it wasn’t until 2011, when the coalition government introduced the triple lock, that a link between the state pension and earnings growth was restored. In the intervening thirty years though, the state pension had lost its value compared to earnings.

So while the triple lock means over time it will rise ahead of earnings, it’s still just making up for lost time. The Pensions Policy Institute reckons it will be 2038 before the triple lock gets back up to 26% of earnings, the level it stood at in 1979. When you consider the UK’s state pension is also meagre compared to international peers, there’s therefore a case for keeping the triple lock in place.

THE BENEFITS TO THE YOUNGER GENERATION

Younger people also potentially stand to benefit from the triple lock, because when they start to draw on the state pension, it will be at a higher level than if the triple lock weren’t there. This does depend on pension policy relying stable though. If you’re 25 years old, you can currently only expect to start drawing your pension from age 68, compared to many people already receiving their pension who would have received it from age 65, or earlier.

If younger generations are to benefit from the triple lock therefore, it’s imperative they don’t pay for it by moving the goalposts even further away when it comes to their state pension age.

This does seem like a somewhat heroic assumption. Particularly in light of the fact the triple lock means taxpayer spending on the state pension is set to rise from around 4.5% of GDP now, to around 7% by 2066, according to a 2018 projection from the Office for Budget Responsibility.

GOALPOSTS LIKELY TO BE MOVED

The reality is that by the time today’s twentysomethings reach retirement age, politicians will probably have moved the goalposts, the corner flags, the pie stand, and changed the shape of the ball. The Government currently faces a dilemma on whether to maintain the triple lock, and no doubt it won’t be the last state pension quandary to arise.

Irrespective of what is decided in Westminster, it still remains the case that the best way to insulate yourself from political interference in your retirement is to build up a big enough private pension of your own, so that you aren’t too reliant on what the state will provide.

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