Featured post

MILLIONS OF SMART METERS MAY HAVE TO BE REPLACED

Six million smart electricity and gas meters installed in homes since 2012 may have to be replaced to make them work with a new communica...

Saturday, 18 April 2015

TRIPLE LOCK TO CONTINUE

The three biggest parties – Conservative, Labour, and Liberal Democrats – are all committed to preserving the Triple Lock for the State Pension. The lock guarantees that the basic state pension, currently £115.95 a week, will rise by prices, earnings, or 2.5% whichever is the highest.

The Institute for Fiscal Studies says the triple lock cost £4.6 billion in 2015/16 alone compared with the cost of using earnings as the index to raise the pension from 2012. That represents a major transfer of state support from younger people to older ones. Over the next parliament the cost of the triple lock compared with raising the pension in line with prices will be much more.

The Office for Budget Responsibility (OBR) predicts that inflation will be just 0.2% this year. But under the triple lock the basic state pension will rise by at least 2.5% in April 2016. The OBR forecasts that the rate of CPI inflation will be below the 2.5% floor of the triple lock in every year of the next parliament.

So we know that the state pension will rise from the present £115.95 by at least 2.5% a year to reach at least £131.20 from April 2020. If the pension rose with CPI instead of 2.5% then it would be just £124.30 from April 2020. And that £6.90 a week extra will mean a cumulative extra bill for the state pension of £12 billion over the next parliament and another £4.6 billion in the year 2020/21 to be paid by the next but one government.

And it gets worse – or at least more expensive. The third ward of the triple lock is earnings. Over the last five years that has never been an issue as earnings have been outpaced by either prices or 2.5%. But earnings are already outpacing inflation and the OBR forecasts that average earnings will grow, as they have in the past, by around two percentage points above inflation. OBR predicts average earnings to rise by 3.1% in 2016, 3.7% in 2017, 4% in 2018, and 4.4% in 2019. So it will be earnings not the floor of 2.5% which will be used to raise the state pension after 2016. That implies a pension of £138 a week by April 2020 which is more than £13.50 a week above the level needed to keep up with prices alone.

There are about 13 million pensioners and that number is not expected to fall – in fact despite the rise in women’s state pension age the number receiving a state pension has risen in just about every quarter since women’s pension age began to creep up from April 2010. Then the number of state pensioners was 12.5 million, now it is around 13 million. So let us assume it will be 13 million on average for the next five years. The minimum extra cost of the state pension rising by 2.5% instead of prices will be £12 billion over the next parliament. And if the earnings figures turn out to be true the extra cost will be £17 billion. 

These are back of the envelope figures. Two factors mean they are too high. 

1. As their state pension income rises, pensioners will be floated off means-tested benefits such as pension credit, housing benefit and council tax support, saving the Government money.

2. Not everyone gets the full basic state pension. Some get less, some more. Any extras on top of the basic are not protected by the triple lock and rise just with prices inflation. So the triple lock only affects a maximum of £115.95 a week. 

But a third factor means the estimate is too low.

3. From April 2016 the new state pension for those reaching pension age will be a lot more than the basic state pension – probably at least £154 a week. As things stand it appears that new pension will be fully protected by the triple lock. So as each new wave of pensioners arrives the triple lock will cost more compared with prices indexation.


Whatever savings there are from (1) and (2) may well be offset by (3). So it may be back of the envelope. But it is not wide of the mark. And whatever the final figure of the cost of the triple lock over the next five years, it seems unlikely to me that the same commitment will make it into the party manifestos for the 2020 election. 

FOOTNOTE
A final note on whether this comparison is a fair one at all. Before the 2010 election the three main parties were committed to raising state pensions by earnings rather than prices. So the extra cost calculated above using earnings as the index would have occurred anyway if that policy had continued. Comparisons with 'would have beens' or 'counter-factuals' as they are now called, are always difficult and needs choices to be made. My choice is to ignore this earnings link and compare the Triple Lock with a rise in prices, the standard way of increasing benefits and pensions for many years until 2010. However, even that assumes that the index would have changed from the RPI to the CPI. That, as I have noted in Triple Locked Down, did have a considerable effect on the level of the state pension at the end of the Coalition Government.

18 April 2015
Version 1.00

This blogpost is a corrected and updated version of my Money Box newsletter 17 April 2015. Subscribe to future newsletters