(Bloomberg) -- The UK’s pension “triple lock” commits the government to providing minimum yearly increases in retirement payouts. The policy is placing a growing burden on strained public finances, making it the subject of intense debate as the country prepares for a general election in July. The governing Conservatives have committed to maintaining it and have even offered an extra tax cut on top. While the Labour opposition has also voiced support for the triple lock, doing away with it could free up money for other urgent spending priorities such as a decaying National Health Service. That would be risky, however, as opinion polls suggest there’s broad support for the triple lock across the generations.
How does the pension triple lock work?
Introduced by a Conservative-Liberal Democrat coalition government in 2010, the triple lock guarantees that the state pension will rise every year by the highest of three metrics: the annual rate of consumer price inflation, average annual national wage growth, or 2.5%. The increase is set each April and affects 12 million retirees. In his March budget, Chancellor of the Exchequer Jeremy Hunt increased the state pension by 8.5% — equivalent to the increase in wages in the three months to July 2023 from the same period of 2022. This means that people who reached the state pension age before April 2016 will receive £8,814 ($11,100) this year while those with post-2016 state pensions will receive £11,502.
Who qualifies for the UK state pension?
Entitlement to the state pension is based on National Insurance records. A total of 30 qualifying years of National Insurance contributions or credits is needed to be eligible for the full basic state pension. And 35 years are required to get the full new state pension. Those who retire overseas receive an increased pension if they live within the European Economic Area, Gibraltar, Switzerland, or in a country that has a social security agreement with the UK. Notable exceptions include Canada and New Zealand.
What does it mean for government finances?
The 8.5% increase would be the highest on record outside the pandemic, and means the triple lock could cost the UK an extra £2 billion a year, for a total annual bill close to £140 billion, according to the Institute of Fiscal Studies think tank. State pensions have risen by about 60% in cash terms since 2010, compared with 40% for average earnings and 42% price growth, according to the IFS.
Why is there pressure to change the triple lock?
Because high inflation and an aging population have imposed a growing burden on national finances more broadly. State pensions are paid through the UK’s Department for Work and Pensions from annual general taxation revenues, including national insurance. It’s the money paid in by people now in work that covers state pension payouts, and the government doesn’t set aside tax revenue to cover future pension liabilities that, according to the Intergenerational Foundation think tank, total close to £3.4 trillion. The triple lock’s increased bill is contributing to a £7.1 billion deficit for the 2024-2025 tax year, according to 2023 estimates from the Government Actuary’s Department.
Why is it dangerous for governments to touch the triple lock?
UK pensioners tend to be reliable voters and the triple lock is popular with them, according to a March survey from pollster Yougov. The poll suggested there’s also little support for changing it among younger generations either. Defenders of the triple lock argue that it protects the incomes of poorer people, for whom the state pension is the chief source of income in older age.
Will Labour scrap the triple lock?
Some British media have reported that Labour plans to maintain the triple lock if they win power. However, party leader Keir Starmer has stopped short of a firm commitment. The Conservatives considered scrapping the triple lock before Hunt eventually committed to maintaining it if they are re-elected. The governing party then promised pensioners a tax cut alongside the triple lock, a policy they’ve dubbed “triple lock plus,” an offer that Labour dismissed as not “credible.”
What could replace the triple lock?
The Organization for Economic Cooperation and Development has suggested that the government replace the triple lock with an average of inflation and wage growth. Some research bodies recommend a “double lock” measure instead, which would get rid of wage growth, or propose lowering the 2.5% fixed rate. Another suggestion has been to use earnings growth as the sole metric, to bring the state pension more in line with incomes among the rest of the workforce. One other option could be to push back the retirement age to ease the cost. Experts largely agree that difficult trade-offs need to be acknowledged to deal with the growing burden on public finances of people living longer.
--With assistance from John Stepek.
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