The pensions triple lock is really for youngsters

29 Nov 2016, by Tim Sharp in Pensions & Investment

One of the myths about the State Pension triple lock is that it is somehow a subsidy of the wealthy old by the impecunious young.

A report released this afternoon by the studiously neutral, Pensions Policy Institute shows two key things:

The triple lock has done the vast bulk of the work in improving pensioner incomes in recent years. That the triple lock is more important to the retirement income of today’s young workers than those currently in or on the cusp of retirement.

The lock has been in place since 2011. The aim of the policy is to gradually raise the value of the State Pension. Its value had withered away following the decision of the Thatcher government in 1980 to end its link with earnings.

Under the triple lock, the basic State Pension or the new State Pension (for those who retired after April 2016) is increased each April by the higher of the growth in average earnings, the Consumer Prices Index (CPI), or 2.5 per cent.

With lacklustre wage growth and rock bottom inflation, the 2.5 per cent increase has been invoked more than many expected. This prompts claims that older people are doing excessively well at a time when disposable incomes for many low and middle income workers are being squeezed.

Its critics tend to ignore three key things:

Some 1.6 million pensioners remain in poverty, mostly women and older pensioners.

Income from workplace pensions is to decline when the next cohort reaches state pension age in the coming five to ten years.

The maintenance of the triple lock will be of greatest benefit to future generations of pensioners due to compound increases as the state pension rebuilds its value.

The scale of this latter point is revealed in numbers crunched by the PPI, as part of its Pensions Landscape study examining the cumulative impact of recent reforms. It considered the total income that people can expect over their retirement. For younger workers, the triple lock is worth tens of thousands of pounds.

The PPI researchers found that when their hypothetical example of a low-earning man, currently aged 35, has his State Pension uprated by the triple lock rather than retail prices index inflation (a proxy for wages), his total retirement income is £257,900. This compares to a total retirement income of £213,000 where his income is uprated by RPI inflation only.

The retirement incomes of those closer to retirement is less influenced by the triple lock. In the case of a hypothetical female median earner aged 62, she gains £23,000 over her retirement through the application of the triple lock (if it is maintained).

The PPI reports that the triple lock outweighs reductions caused by increases to State Pension age for all individuals it modelled.

Young people might well have a case to feel diddled by tuition fees (in England at least), by house prices (everywhere) and stagnant wages (ditto).

But they should also feel aggrieved that there are some suggesting that the triple lock should be axed in their interests.