The switch from the state pension triple lock to a double lock proposed in the Conservative manifesto does little to resolve the pressures an ageing population will put on the public finances, according to the Institute for Fiscal Studies.
Yesterday (18 May) the Conservatives announced that they would abandon the state pension triple lock after 2020 and replace it with a new double lock.
The double lock will mean that pensions will increase in line with earnings or in line with inflation, whichever is greater, but the IFS stated this will have only a marginal improvement on the nation’s finances.
The fundamental reason for this is that it is pretty rare for both average earnings and inflation to be less than 2.5 per cent.
So getting rid of the 2.5 per cent element of the triple lock does little to change the projected long-run generosity of the state pension.
Half of the increase in the state pension spending forecast over the next 50 years (0.9 per cent of national income, or nearly £20bnn in today’s terms) is explained by the triple lock, rather than other factors.
However, according to the IFS “moving to a double lock does very little to help. State pension spending in 50 years’ time is only 0.2 per cent of national income lower (less than £5bn in today’s terms).
"In other words, moving to a double lock undoes only around a quarter of the damage done by the triple lock to the long-run sustainability of the public finances.
"So with the double lock in place spending on the state pension would still be projected to increase by 1.6 per cent of national income (a little over £30bn in today’s terms) over the next 50 years, with over 40 per cent of this increase being explained by the double lock (relative to increasing in line with average earnings) rather than other factors.”
The IFS stated it is possible to insure pensioners against the state pension ever falling in real terms without the ‘ratchet’ effect that means both a triple-locked and double-locked state pension would increase faster than earnings or prices over the long run.
The answer is the ‘smoothed earnings link’ which makes sure the state pension never falls in real terms, and increases in line with earnings growth over the long run.
The UK state pension remains one of the lowest in the Organisation for Economic Co-operation and Development (OECD).
Trades Union Congress general secretary Frances O’Grady said: “The Conservatives have made the wrong political choice. If they can afford to cut corporation taxes, they can afford to keep the triple lock.
“The UK has more than 1.5 million pensioners in poverty. And one of the lowest state pensions in the advanced world.”