Triple lock: 6.6% increase would give pensioners an income increase from £179.60 to £191.45
A profit increase of 6.6 percent increases pressure on the chancellor over whether or not to fulfill the triple lock promise and give a huge increase in the state pension for the elderly next year.
Earnings figures have been greatly distorted by the Covid crash and are artificially high, but 90 percent of the more than 3,000 This is Money readers who voted in a poll said the triple lock should be fully respected.
The latest increase would give retirees an income increase from £179.60 to £191.45 a week, but the wage increase announced in September will be the defining figure – and could be even higher by then.
The triple lock is the government’s promise to raise the state pension at the highest price inflation, average income growth or 2.5 percent, and the pledge was renewed in its latest election manifesto.
This is Money readers are excited to see this honoured, voting nine to one in our ongoing poll (scroll down to give your opinion) and retirees pointing out that they struggle to make ends meet when they retire.
But Rishi Sunak is already hinting that he may not pay the costs, and commentators have pointed out that wages are now only rising as many workers suffered the misery of wage cuts and job losses when the pandemic hit last year.
Many were given leave, saw pay cuts or freezes, while lower-paid workers were pushed out of the workforce, artificially inflating average wages for now.
Pension experts say Sunak could solve the problem by flattening wage growth over two or three years, as a one-off measure due to the unprecedented disruptions caused by the pandemic – we’ve looked at his top options here.
The Treasury is likely to come up with an acceptable fudge after the key wage growth figure comes out in September, or at the latest when inflation is announced in October.
The cabinet does not want older voters to be carried away too long by the prospect of a substantial AOW increase if it certainly does not intend to realize one in the spring.
Older people on the full flat rate are currently getting £179.60 a week or about £9,300 a year, and a 6.6 percent increase would increase this to £191.45 and about £10,000.
The old basic pension, excluding the second state pension or SERPS that people have accrued on top of that, is £137.60 or about £7,200 a year. So this would add up to £146.70 or about £7,600.
‘A big rise now would be locked up for good’
“The numbers expose the challenge Rishi Sunak is grappling with,” said Sarah Coles, personal finance analyst at Hargreaves Lansdown, of the latest pay increase announcement.
‘If you compare it with last year, wage inflation in the three months to May was no less than 7.3 percent’ [including bonuses], and in May the annual increase was 8.6 percent. If wage increases like these feed through into the triple lock of state pensions, the government threatens to pay out billions of pounds more than planned.
“In May, we started comparing wages to three months after the first lockdown, when the hours dropped, millions were paid and wages fell dramatically, so much of the increase is due to us comparing wages to such a low level.
‘The problem for the government is that if it sticks to the triple lock in its current form, a substantial increase in the state pension this year will not only cost more.
“This increase is fixed for good, so the extra costs stretch far into the distance. The triple lock just can’t handle sudden and wispy pay changes.
Sunak has already suggested that he might reconsider the role of the triple lock in the future, and these figures indicate that an element of flattening the wage figures could be appropriate.
“It would mean flattening the peaks to a more gradual rise, so retirees keep the incredible value of the triple lock, and the government doesn’t have to fumble around trying to find billions of pounds in its budget.”
‘Increase in state pension can amount to about 3.5% if flattened over two years’
“Last month, the Office for National Statistics suggested a more accurate figure of median income, with distortions removed, at around 3 percent,” said Steven Cameron, Aegon director of pensions.
“In a blog published today, they updated this to between 3.2 percent and 4.4 percent. Using these numbers could be an option for the chancellor to maintain the triple lock principles, albeit with modification.
Another consideration would be to smooth out the sharp spikes and dips we see in earnings growth and base triple lock gains on experience over two or more years.
“The ONS report points out that over a two-year period, average income growth of 7.1 percent is actually less than the one-year increase of 8.6 percent. On a two-year average, the profit component would be around 3.5 percent.
The triple lock will cost the government about £0.9bn for every 1 percent increase, so Rishi Sunak may still be hoping for an easing of average earnings above the all-important July figure published in September, but the time is running out.
“The Chancellor has said that decisions to get Britain’s finances back on track after the pandemic will have to take into account the interests of different generations.
‘The state pension is paid out of the national insurance contributions of the current employees, so the government faces a difficult balancing act.
“Questions will arise about intergenerational fairness if state retirees receive a raise of 8 percent or more paid by today’s workers, which is well above the pay increases that workers have typically received.”
State pension dilemma: Chancellor Rishi Sunak already hints he could hesitate at the cost of a huge jump in spring
‘Young people ultimately benefit from it, but that is far from being the case’
The chancellor could temporarily adjust the triple lock by using a three-year moving average for wage growth, which would increase the state pension by 3.4 percent in 2022/23 and save the government £3.5 billion next year, Jon Greer said. head of pension policy at Quilter.
“The triple lock has become a symbol of intergenerational tension, exacerbated by the rather artificial rise in earnings we’re starting to see this year,” he says.
“On the one hand, some say the triple lock should be removed because it would give a huge boost to pensioners’ incomes at a time when many young people will struggle to find work and still recover from the sacrifices they have had to make. . made in the last 16 months.
‘On the other hand, there are arguments that young people should welcome the increased state pension, since they will one day receive the benefit themselves.
The truth is that both arguments are correct. Young people will eventually benefit, but that is still a long time away. What matters in the here and now is that the increase in state pensions is done in a way that links the income of retirees to experiences in the wider economy.
‘Real wages don’t really grow by 7.3 percent’ [6.6 per cent excluding bonuses] if you remove the disruptive impact of Covid on the labor market.’
‘Political price of breaking an obligation to older voters may be too heavy to bear’
“Chancellor Rishi Sunak faces being caught between the devil and the deep blue sea on the state pension triple lock,” said Tom Selby, senior analyst at AJ Bell.
“Lockdown has created an extreme set of circumstances that cut salaries in 2020, with millions of people being laid off at 80 percent of their usual wages.
As the economy returns to something closer to ‘normal’ this summer, both earnings and inflation – two of the three elements of the triple-lock – are expected to rise.
The Office for Budget Responsibility estimates that every 1% added to the state pension through the triple lock costs the Treasury just under £1 billion.
“Such numbers are enough to make a Chancellor shudder even in normal economic times, let alone after a year in which loans have risen by hundreds of billions of pounds.
One option would be to remove the revenue element of the triple-lock altogether, either just for this year or perhaps for the rest of this Parliament.
“However, the political price of breaking a manifesto commitment affecting older voters may be too heavy to bear.
“Alternatively, the triple-lock methodology could be modified so that the average income over a longer period of time is used as a reference point instead of the figure for the three months to July.
“This would help smooth the rise and also allow the chancellor to say the triple lock remains intact.”
Does the triple lock pay out if it means an 8% AOW increase?
Is it fair for retirees to get a bumper increase based on a disruption caused by the wage pain experienced by workers in lockdown?
Some say ‘no’, others say ‘keep your appointment’.
In this podcast, Tanya Jefferies, Georgie Frost and Simon Lambert look at what is causing the triple lock anomaly and what the government could do. Will they pay or screw it up?
Plus, the painful cases of those unable to afford funerals for loved ones, the return of gazumping to the real estate market, and finally, the crazy NatWest banking rule that has forced a reader to combine their employer’s bank accounts with theirs in online banking.
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