Interactive Investor

State pensions could be sacrificed to pay Covid bill

8th September 2020 12:25

Laura Miller from interactive investor

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Triple lock back in the spotlight as the government eyes watering down the benefit for retirees.

Pensioners face growing calls for their state pensions to be watered down, which would end a decade of inflation and earnings-busting increases in the benefits.

Chancellor Rishi Sunak is expected to use the 2020 Autumn Budget to find ways to pay the ballooning bill for supporting workers and businesses through the coronavirus outbreak.

Already the job retention scheme is estimated to have cost £80 billion, amid calls for it to be extended beyond October to stave off a swathe of redundancies.

Pensioners receiving the state pension have enjoyed 10 years of protection in the form of the triple lock.

This promise guaranteed the benefit kept pace with the cost of living by increasing every year in line with inflation, growth in earnings, or 2.5%, whichever was higher.

A decade of stagnant wages and record-low inflation has meant pensioners enjoyed a 2.5% pay rise every year, higher than workers and increases in the cost of living. But that could be set to end, as speculation mounts that the triple lock will be axed in the Budget.

Today, the Pension Policy Institute (PPI) think tank suggests the government may use a smoothing mechanism to keep state pension costs down in 2021. This would save the Treasury £15 billion and keep state pension increases below both earnings and 2.5%.

This would mean that pensioner incomes do not increase as quickly. Under the triple lock, average pensioner incomes could reach up to 31% of national average earnings by 2040, according to the PPI.

This compares to up to 30% under a double lock and up to 29% under smoothing for one year.

In May, reports suggested the Treasury was considering moving from the triple lock to a double lock -  increasing the level of the state pension by the higher of the consumer prices index (CPI) measure of inflation, or earnings, not 2.5% - as a way of reducing the economic impact arising from the pandemic.

But the PPI points out that this would leave the Treasury no better off. If employment figures return to anywhere near pre-Covid-19 levels in 2021, earnings inflation will appear artificially high as it will reflect the jump from reduced levels plus any new earnings inflation.  

As a result, the increase in earnings is likely to be above 2.5% in 2021, meaning the increase in state pension income and costs would be the same under a double or triple lock.

Steve Cameron, pensions director at Aegon, said: “Simply scrapping the triple lock would be seen as a major U-turn on a key manifesto commitment, which would go down very badly with pensioner voters. 

“But leaving the formula unchanged when average earnings are falling this year and may rocket next, could grant state pensioners a huge increase in 2022, which would not go down well with the working-age population who pays for this through National Insurance. 

“Adjusting the formula, for example, by averaging out earnings growth over two years could strike a fair balance.”

The full new state pension is £175.20 per week. The actual amount you get depends on your National Insurance record.

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