U.K. Policy Risks Pensions Outstripping Wage Growth Through 2022
The discrepancy is caused as the coronavirus pandemic bites, and millions of workers draw on government support.
(Bloomberg) -- The U.K. state pension may grow considerably faster than earnings over the next two years, a think tank estimates, increasing generational inequalities and swelling the cost of one of the government’s flagship pledges.
The warning comes amid speculation Chancellor of the Exchequer Rishi Sunak may be forced to suspend the policy as a result of the pandemic, risking the ire of some of his party’s traditional supporters.
The Resolution Foundation says the triple lock -- a promise to raise the state pension every year by whatever is highest out of the annual growth in average earnings, inflation, or 2.5% -- will see the cash value of the benefit increase by 7.6% between 2020 and 2022, compared with a 1.5% rise in wages.
That will cost 3 billion pounds ($4 billion) more in 2022 than if pensions had kept pace with earnings, and 2.1 billion pounds more than if it had followed inflation, the think tank said.
While the “aim may be laudable, the policy itself is a mess and needs to be replaced,” said Laura Gardiner, the foundation’s research director. “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.”
The discrepancy is caused by a projected drop in earnings this year as the coronavirus pandemic bites and millions of workers draw on government support. Pensions with be protected from the slump by the triple lock, and then benefit from the rapid rebound.
Resolution’s Outlook
| 2021 | 2022 | Total | |
|---|---|---|---|
| Pension | 2.5% | 5% | 7.6% |
| Earnings | -3.3% | 5% | 1.5% |
The increase in working age benefits, which are increased in line with inflation, will also be outpaced.
The Resolution Foundation recommended the government should either temporarily switch to operating the policy over the coming two years as a whole, with a 5% backdrop, or better still increase pensions via a “smoothed earnings link.”
“This would see long term growth in line with earnings, but with temporary protections for years when price rise faster than earnings,” the foundation said.
Officials are aware that the pensions triple lock, promised by the last three Conservative prime ministers as a guarantee that retirement incomes will keep rising, may have to be reviewed, a person familiar with the matter said. Even so, earlier this month, a government spokesman said the prime minister has “no plans” to abolish the policy.
©2020 Bloomberg L.P.
