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This updates an article first published on 19/6/13.
The debate about the future of the pension 'triple lock' that determines how much income pensioners receive from the government has reared its head again. As a result this expensive guarantee may be closer to the chop than ever before.
The triple lock was introduced in 2010 by the Conservative-Liberal Democrat coalition government. It was a guarantee to increase the state pension every year by the higher of inflation, average earnings or a minimum of 2.5%.
The idea behind it was to protect pensioners from meaningless increases in the state pension, such as the 75p a week rise in 2000, and to make sure their income was not eroded by the gradual increase in the cost of living.
At the moment nothing is happening to the triple lock, but it does not look likely to survive another five years intact if Theresa May is elected prime minister in the general election on 8 June.
The triple lock allows your state pension to keep growing at a rate that allows you to purchase the same amount of goods as last year.
If the triple lock is replaced with a link to average earnings and inflation is higher than average earnings then the value of pension income will be eroded, meaning pensioners will be able to buy less with their money.
As is usual with guarantees, they cost money. And this guarantee is very expensive; £45 billion over the next 15 years.
This is on top of the large bill already paid out for pensioner benefits. The cost of the state pension was due to increase to 6.6% of gross domestic product (GDP) in 2016, rising to 8.5% by 2060. After that the bill is forecast to fall slightly to 8.1% of GDP as the benefits of the new cheaper, single-tier state pension are felt.
The fact is the UK is an aging society and with a lot more people living into their eighties and nineties, the government has to pay the state pension for much longer than originally envisaged. In short, it can’t afford the triple lock.
The prime minister Theresa May has not been drawn on whether she will continue the triple lock if she wins another term in office.
While her silence has led to speculation that she will withdraw the guarantee, others think she will not want to anger the 'grey vote' and instead may alter the triple lock and make it less generous.
These fears are compounded by the government-commissioned review of the state pension that was published earlier this year.
In his final report on the state pension, John Cridland, former director of the Confederation of British Industry, recommended scrapping the triple lock.
As well as speeding up increases to the state pension age, Cridland said the triple lock should ‘be withdrawn in the next parliament’.
Cridland said this was necessary to reverse the rising cost of state pensions with projections from the official budget watchdog, the Office of Budget Responsibility (OBR), suggesting the triple lock would add 1% to the overall state pension bill as a proportion of GDP over the next 20 years.
‘Under our recommended timetable, state pension spending would be 6.7% of GDP in 2066/67, which is a reduction of 0.3% compared to the principal OBR projection. If the triple lock is withdrawn, spending will be further reduced to 5.9% of GDP by 2066/67,’ he said.
The Organisation of Economic Co-operation and Development (OECD), which represents 35 countries around the world, has waded into the row over UK pensioner benefits, stating that the triple lock was ‘putting one group in society [pensioners] on a pedestal over another’.
Mark Pearson, deputy director of employment at the OECD, questioned whether it was fair to ask working age people to pay more instead of asking soon-to-be pensioners to work longer before they can claim their state pension.
While the Conservatives have kept quiet about their exact plans for the triple lock, Labour has said it is committed to continuing the guarantee through the next parliament should it gain power.
Labour leader Jeremy Corbyn insisted the party would not 'move the goalposts'.
At the moment no political party has proposed a solution to our inability to foot the costs of a triple lock, while ensuring pensioners have sufficient income to live each year.
But pensions are such a vote-winner that we could see a change in the game yet.
Former Lib Dem pensions minister Steve Webb fought hard for the triple lock when he was in the coalition government but he has had a change of heart since he lost his seat and became policy director at pension provider Royal London.
He has proposed a ‘middle way’ for the guarantee to reduce the expense. This involves retaining the triple lock for those who retired before 8 April 2016 but offering those who retire after this date increases in line with earnings only. This would save an estimated £3 billion a year by 2028.
Webb’s argument is that newer pensioners are on average £100 a week better off than those aged over 75s and the money saved could be better spent helping more elderly pensioners.
Another former pensions minister, Ros Altmann, has said a 'double lock' should be brought in that drops the link to 2.5% but uprates the state pension by the higher of earnings or inflation.
However, the independent Institute for Fiscal Studies has said that even a double lock would not solve the cost problem of the state pension and that the value of the state pension would eventually outstrip earnings and prices.