The Treasury is planning to honour the Triple Lock on pension increases again this year which (according to the FT) will lead to more than 8% higher state pensions for those 66 or more. The rise comes on top of a 10.1% increase last year meaning that pensions in the last two years have risen by more than 12.5% more than prices. The triple lock means that going back to 2010, the state pension will be 11.3% higher than if it had been increased in line with earnings.
The average wage inflation figure (April- June) has been 8.2%, one more month at comparable rates is expected to be announced shortly.
My friend Mike Harrison has referred to this increase in the state pension as bonkers. But this assumes that back in 2010, the State Pension was worthy of the name. In fact it wasn’t. By comparison to our G7 and European peers, the UK State Pension was then “nugatory” , the victim of years of under re-valuation.
What we have today, and will have in 2045-25 is a pension worthier of the state. This is not bonkers and the means that the rerating has been achieved is both sophisticated and successful.
It will of course benefit those beyond state pension age first, but these increases will be there for generations to come and are to be celebrated by all age groups.
Don’t knock it!
Although the state pension benefits everyone to the same nominal amount, it is particularly important to those on low incomes to whom it provides a much higher replacement of pre-retirement income than for those on higher earnings. Many low-earners have missed out on private pensions for a variety of reasons (we won’t go into here). They have not benefited from the fiscal incentives to pension saving to the same degree as high earners. The State Pension is one of the few redistributive elements in our pension system, it is progressive.
Don’t bemoan the cost – celebrate it!
The Department for Work and Pensions has estimated the cost of the state pension will rise from £124bn this year to £134bn next year — with the peg to rapid wage growth adding almost £3bn to this figure.
Based on the history of the triple lock since 2010, the OBR estimated that the average annual increase in the state pension would cost 1.9 per cent of GDP every year by 2072-73 — adding a total of £943bn to the UK’s public debt over the 50-year period.
These are the huge numbers that are needed to support a proper welfare system. They will bring many pensioners out of poverty and – coupled with the incipient workplace pension system will mean that ordinary people can start looking forward to retirement with hope and expectation.
But despite this self-evident good news, I fear that the successful application of the triple lock this year will again be greeted with at best lukewarm acclaim by many in pensions. For many of us, dependency on private rather than public pensions is the long-term aim. Only this week, one think tank was calling for increases to auto-enrolment that would have ordinary people having 16% of total earnings paid into funded pensions.
The reality is that for many low-income households, the state pension is the most-valuable financial asset they have and – even with a 16% pa contribution from pay, a private pension would struggle to pay more. It has an estimated replacement cost of over £200,000, even at today’s high annuity rates. Despite some well publicised administrative blunders, the DWP continue to administer this economic marvel efficiently and effectively. It is to be celebrated.