Ed Conway analysis: What is the 'pension triple lock'?

Summary

The UK’s pension triple lock guarantees pension increases based on the highest of 2.5%, inflation, or earnings growth, with recent increases driven by a rise in earnings. This policy, originally introduced to combat pensioner poverty, has led to higher pension payouts, but it's raising concerns over its long-term affordability. As pensioner spending now surpasses defense spending, the growing cost of the triple lock (projected at £47 billion) raises questions about whether it remains sustainable. While pensioner poverty has decreased, child poverty remains a growing issue, highlighting the complex economic trade-offs.

Takeaways

• 😀 The pension triple lock ensures that UK state pensions increase each year by the higher of 2.5%, inflation, or earnings growth.
• 😀 The triple lock was introduced in 2011 to combat pensioner poverty, a major issue in the 1990s when many pensioners lived in poverty.
• 😀 Pensioner poverty has significantly decreased since the introduction of the triple lock, improving financial security for pensioners.
• 😀 The current state pension increase is projected to be 4.7%, which is higher than inflation and earnings growth, ensuring a substantial rise in pension payments.
• 😀 The increase in state pensions is causing some pensioners to reach or exceed the personal tax allowance, resulting in them paying taxes on their pensions.
• 😀 Since its introduction, the triple lock has helped pensions grow faster than inflation and earnings, making the current state pension one of the most generous since the 1980s.
• 😀 The triple lock’s growing cost is a major concern, with projections showing that pension spending will soon exceed defense spending in the UK.
• 😀 Eliminating the triple lock and linking pension increases to earnings growth could save the government billions, potentially reducing the financial strain.
• 😀 Despite the cost, many argue that the triple lock is essential for maintaining pensioner welfare and preventing a return to high levels of pensioner poverty.
• 😀 Although pensioner poverty has decreased, child poverty is rising faster, highlighting a shift in the UK's poverty demographics and suggesting that child poverty is now the country’s most urgent issue.

Q & A

What is the pension triple lock, and how does it work?

The pension triple lock is a rule used to determine how much the state pension increases each year. It states that pensions will rise by the higher of three factors: 2.5%, the Consumer Price Index (CPI) inflation rate, or earnings growth. If earnings growth is the highest, the pension increases by that amount. For example, if earnings grew by 4.1%, pensions would rise by 4.1%.

Why was the pension triple lock introduced in the first place?

The pension triple lock was introduced to address the issue of pensioner poverty, which was particularly high in the 1990s. The goal was to ensure that pensions grew in line with earnings, inflation, or at least 2.5%, in order to prevent the purchasing power of pensioners from declining.

What impact has the triple lock had on pensioner poverty over the years?

Since the introduction of the triple lock, pensioner poverty has decreased significantly, especially when compared to other age groups. Pensioners have seen their pensions grow faster than inflation and earnings in recent years, which has helped reduce poverty levels among older citizens.

What is the current issue surrounding the affordability of the pension triple lock?

The affordability of the triple lock is a major concern, as it results in a significant increase in government spending. The projected cost of maintaining the triple lock is estimated to be around £47 billion more than if pensions were only increased in line with earnings, creating a large financial burden on the economy.

What is the difference between the basic state pension and the new state pension?

The basic state pension is the older form of the UK state pension, while the new state pension is for people who started receiving their pension after April 6, 2016. The new state pension is generally higher and has slightly different eligibility criteria and benefit structure compared to the old basic pension.

How does the pension triple lock affect tax payments for pensioners?

Due to the increases in pensions under the triple lock, some pensioners may find themselves paying tax on their state pension, even though it is meant to provide basic income. This happens because the state pension can rise above the personal tax allowance, which currently stands at £12,570.

How has pensioner poverty changed in relation to other groups in the UK?

Pensioner poverty has decreased significantly, and it is now lower than poverty among working-age adults. However, child poverty remains a more pressing issue, with rates of child poverty rising faster than those of pensioner poverty.

What are the projections for pensioner incomes in the future compared to other age groups?

Projections show that pensioner disposable incomes are expected to rise much more sharply than those of other age groups, including working-age adults and children. This trend reflects the increasing generosity of pensions under the triple lock system.

How does the government's spending on pensions compare to defense spending?

The government currently spends more on pensions than on defense. Historically, defense spending used to be far higher than pension spending, but this has reversed over the years. Although defense spending is expected to rise, pension spending will continue to increase as well.

What are the potential consequences of abolishing the triple lock?

If the triple lock were abolished and pensions were only increased in line with earnings, the government would save a significant amount of money, potentially up to £47 billion. However, this could also lead to a decrease in pensioner income and potentially increase pensioner poverty in the future.