State pension could climb 5 times faster than earnings

The state pension could rise by five times as much as average weekly earnings over the next two years, according to the Resolution Foundation.

The independent think-tank has forecast that the state pension could climb by 7.6 per cent over the period, outpacing average weekly earnings which are set to rise by just 1.5 per cent.

It explained that this issue is likely to be driven by the triple lock system, which ensures that the state pension rises by whichever is highest: average wages, prices, or 2.5 per cent.

With CPI inflation having fallen to 0.5 per cent in May, its lowest level in four years, and average earnings likely to fall between May and July as the economy and job markets struggle with coronavirus and furloughing, the state pension looks on course to rise by 2.5 per cent in April 2021.

The following year is likely to see economic recovery, with the Resolution Foundation’s research envisaging an around 5 per cent recovery in average weekly earnings as pay climbs back to pre-pandemic levels, leading the state pension to receive a sizeable boost.

The think-tank said this would likely mean the government will be shelling out an extra £3bn in 2022 and each subsequent year than if the state pension had kept pace with earnings over this period, and £2.1bn more than if it had kept pace with CPI inflation.

It therefore called for the government to fix the triple lock policy, noting that one potential solution would be to enforce the rules of the triple lock not in each year, but over the coming two years as a whole, as a means of avoiding artificial volatility in measured average wages.

However, the think-tank favoured a “smoothed earnings mechanism”, which it said would maintain “a peg to earnings over the medium term, but allows short-term deviations to protect the value of the state pension during periods of weak growth in wages, or fast growth in price”.

The Resolution Foundation report stated: “Good policy making requires separating our objectives from the tools we use to achieve them. Whatever your objective for the state pension, the triple lock is a poor tool for achieving it, as the next two years looks set to make very clear.”

The think-tank is not the first entity to warn of the issues that might be caused by the triple lock, with Willis Towers Watson claiming that state pensions could rise by as much as 21.3 per cent over a two-year period if there was a V-shaped economic recovery.

The Financial Times has also reported that Chancellor Rishi Sunak has contemplated breaking a Conservative Party manifesto pledge by ditching the policy.

However, the policy’s supporters remain as the Communication Workers Union (CWU) has written to its members urging them to contact their MP with requests for their support in defending the state pension triple lock from being scrapped.

The foundation’s research also noted that this seemed “indefensible” when continued jumps in state pension were contrasted with “the erosion of the value of working-age benefits”.

Up until the early 1970’s, the state pension was consistently on par with unemployment benefits, but now weekly income from state pension is almost double that received by the unemployed.

Unemployment benefits have flatlined for around two decades, while child benefits and have remained similarly unchanged over the same period.

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