U.K.’s Sunak to Protect Pensioners With Triple Lock Pledge
(Bloomberg) -- U.K. finance minister Rishi Sunak is planning to keep the government’s promise to increase the state pensions of millions of elderly people by at least 2.5% every year, saving a flagship policy despite the costs.
According to a person familiar with the matter, the Chancellor of the Exchequer will retain the “triple lock” guarantee to raise the state pension by the highest of three measures: annual growth in average earnings, inflation, or 2.5%. Around 12.5 million people receive the pension.
The risk is that the economic chaos of the pandemic will make the policy -- set to be confirmed at next month’s budget -- far more expensive than planned. The budget deficit is already on course to reach 400 billion pounds ($546 billion) this year and Sunak is anxious to begin to reduce borrowing.
For now, though, with the U.K. still in the grips of its third national lockdown and more than 100,000 people dead from coronavirus, Prime Minister Boris Johnson and his team are focused on extending emergency support for jobs to help the economy rebound after the pandemic.
With the effect of the crisis on this year’s data for average earnings still unknown, the state pension guarantee will stay, the person added, speaking anonymously because budget planning is confidential.
The way the triple lock has operated in the pandemic provides a “stark illustration” of how poorly designed the policy is, according to Institute for Government Chief Economist Gemma Tetlow.
“The value of state pensions was insulated from the downturn but will benefit from the artificial rebound next year,” she said. “There are better ways of insulating pensioner incomes during economic downturns while also ensuring that the value of the state pension does not rise inexorably relative to the incomes of the working age population.”
The pensions triple lock dates back to 2010 when David Cameron was prime minister and successive Conservative leaders have kept it in place ever since. The pledge, which benefits an elderly section of the electorate who traditionally are more likely to vote Tory, has lifted earnings of pensioners relative to the workforce by 875 pounds a year over the past decade, according to House of Commons research.
Sunak “is favoring spending on older people who have been largely financially insulated during the pandemic thanks to regular pension income,” said Ashley Seager, co-founder of the Intergenerational Foundation. “This is a huge intergenerational unfairness toward younger working-age people, many of whom have lost their livelihoods, homes and even mental health, in order to protect the old, but who will be expected to pay the bill.”
The triple lock means the annual cost of the state pension is now some 7.9 billion pounds more than it would have been if it had solely tracked earnings since the 2011/12 tax year, according to the House of Commons analysis.
Adding to Cost
With the annual bill for pensions standing at a shade over 100 billion pounds, each extra percentage point adds a billion pounds to the cost.
The effects of the pandemic -– depressing wages for those on furlough -- means there’s a chance earnings will bounce back once lockdown restrictions are over and businesses reopen. That would force an expensive rise in pensions if the rebound is greater than 2.5%.
The government’s own fiscal watchdog, the Office for Budget Responsibility, predicted in November that the triple lock pledge may entail a 4.1% uplift in pensions next year. That forecast was made before furlough was extended, which may affect the time period over which wages rebound.
Economists have suggested the triple lock should be scrapped to cut costs and to avoid worsening inequalities between pensioners and younger workers who have been particularly badly hit by the recession.
Work and Pensions Secretary Therese Coffey in November announced a 2.5% uplift in the state pension to take effect in April. The pension rates for April 2022 are expected to be announced in the fall, after earnings and inflation data have been published.
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