The Triple Lock
October 22nd, 2015
The DWP has contacted those who expressed an interest in Class 3A contributions ahead of the official launch date.
Yesterday’s Labour Market statistics from the Office for National Statistics showed earnings rising by 3.0% including bonuses and 2.8% excluding bonuses. Assuming that the 3% figure holds, the result will be a £3.45 a week increase in the basic state pension from next April, to £119.40 a week. This has two knock-on effects:
- As the standard minimum guarantee element of pension credit (the old minimum income guarantee) now increases by the cash amount of the basic state pension rise that implies a standard minimum guarantee of £154.65 a week from next April.
- The single tier pension has notionally been set at the standard minimum guarantee plus 5p a week in the past couple of years, leading to a 2016/17 initial rate of £154.70 a week. Note that this is only a 2.25% increase on the 2015/16 notional figure (£151.25) because it is driven by the cash increase to the basic state pension.
From 2016/17 until the end of this parliament (2020/21), the government is pledged to maintain the triple lock on the basic state and single tier pensions. This is starting to appear an unaffordable.
Last week the Government Actuary’s Department mistakenly placed online a report (alas, hastily withdrawn) warning that the triple lock was increasingly expensive. The triple lock, introduced by the coalition government in 2010 and effective from 2011, is already costing £6bn a year over what a pure earnings link would have done. Further out it could add 9% to benefit expenditure by 2040 and 23% by 2070. However, if the UK continues to suffer low inflation and low earnings growth, the 2.5% triple lock floor starts biting and the extra burden becomes 11% and 41%. Japanese-level deflation would bring the 2070 figure to 238% according to the GAD.
The most recent Fiscal Sustainability Report from the Office for Budget Responsibility increased the cost of the triple lock by assuming that it would in the long term equate to earnings growth + 0.39% rather than its previous + 0.3% estimate. There is a case for saying that economic conditions have moved on from 2010 (when CPI inflation was 3.7%) and that, if nothing else, the triple lock floor now needs to be lower than 2.5%. However, politicians do not like upsetting the section of the population most likely to turn out and vote – pensioners.