State pension payments will increase every year by the highest of wage growth, inflation or 2.5 percent under triple lock rules. However, given the economic impact that coronavirus is having, the affordability of the scheme has been questioned in recent weeks and there have been reports that the government may be considering making changes.
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Recent analysis from Quilter showed just how this could work in practice.
According to their research, wages are expected to fall by 3.3 percent this year but then bounce back next year, creating a one-off spike in wage growth, boosting it by five percent.
They detailed that under the triple lock rules, the old-style state pension could increase by £532.20 a year by 2022/23 and the new style state pension by £694.67 a year.
All of this would occur at a time when many will be out of work and inflation will remain low.
Quilter went on to provide analysis on how a temporary fix could be found.
They explained that Rishi Sunak could maintain the triple lock but use a five-year rolling average for wage growth rather than using the year-on-year figure.
If this methodology were to be used, the old-style state pension will only increase by £374.88 a year in 2022/23 and the new state pension by £489.23.
According to their analysis, this would be equivalent to the government saving approximately £2.2billion by 2022/23.
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This methodology, Quilter claimed, would provide a short-term solution to the abnormal wage volatility issue next year while maintaining a link to long-term wage growth.
It could provide the government with an opportunity to consider whether a long-term solution is required to protect state pensions if the triple lock scheme needs to be removed.
Jon Greer, the Head of Retirement Policy at Quilter, commented on the triple lock situation.
As he detailed: “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.
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“However, once the furlough scheme ends later this year and wages recover to their normal levels, 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.
“Despite a pledge to maintain the triple lock in his government’s election manifesto, this quirk in the system could mean the triple lock is high on the Chancellor’s list of fiscal changes when he sets out the government’s post-Covid recovery plans in the coming weeks.
“The government could temporarily amend the triple lock by uprating the state pension based on the higher of 2.5 percent, inflation or five year rolling average wage growth. This will smooth any abnormal wage effects whilst protecting real incomes and saving the government a considerable amount each year.
“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, such as a smoothed earnings link, so that pensioners share in the proceeds of economic growth, whilst protecting their income against inflation and ensuring intergenerational fairness”.
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