The triple lock is hugely popular having dragged millions of pensioners out of poverty, yet has come under increasing attack for being unaffordable. While Hunt would be foolish to disappoint pensioners ahead of next year’s general election, both the Conservative and Labour leadership are cagey about the triple lock’s long-term future.
If the state pension had only grown in line with either prices or earnings instead, it would be worth 11 percent less today, according to The Institute for Fiscal Studies (IFS).
Pensioners would be much poorer as a result but the triple lock could add as much as £45billion a year to welfare spending by 2050, the IFS said.
Critics have argued the triple lock is unfair on younger workers, having granted pensioners an inflation-linked 10.1 percent increase in April. Ironically, the better it works, the more criticism it will attract.
One proposal is to downgrade it to a double lock, says Becky O’Connor, director of public affairs at PensionBee. “This would mean dropping the earnings element and increasing the state pension either by inflation or 2.5 percent, whichever is higher. Alternatively, the state pension could just be linked to inflation.”
Arguments that the triple lock is unfair on younger people are wide of the mark as it protects future generations, too, she added. “Without some form of index-linking, it will be today’s young workers who suffer most when they reach their 60s and 70s.”
So what will Hunt do?
His easiest option, at least in the short term, would be to wave through the full 8.5 percent increase, based on earnings growth in the three months to July.
This was higher than September’s inflation figure of 6.7 percent and will look even more generous with inflation set to fall, when the increase comes into force, said Steven Cameron, pensions director at Aegon. “With inflation already down to 4.6 percent the state pension hike could be more than double next April’s inflation rate.”
This would lift the full new state pension from today’s £10,600 to about £11,501 annually.
Alternatively, Hunt could save some money by arguing that NHS bonus payouts inflated July’s earnings figure and hand pensioners a reduced increase of 7.8 percent instead.
That would lift the new state pension to a maximum of £11,427. That’s just £74 a year less but would save the Treasury around £600million in total.
By doing this, Hunt could claim he has stuck with the triple-lock pledge while also saving some cash, said Tom Selby, head of retirement policy at AJ Bell. “It would still be a huge risk with a general election edging nearer as he would inevitably face accusations of a stealth attack on pensioner incomes.”
Granting the lower figure is arguably “quite a sensible alteration”, said Sian Steele, head of tax at wealth advisers Evelyn Partners. “The surprise is that successive governments allowed bonuses to be included in the calculation at all, as they are volatile and only benefit a small proportion of the working population. This year’s figure was particularly distorted by a one-off NHS deal.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said the state pension is the foundation of everybody’s retirement planning, young or old, and must be treated with care. “We need to see real long-term thinking to ensure it remains sustainable in the long-term and allows people to plan their retirement with confidence.”
Hunt would be foolhardy to annoy pensioners so close to polling day, and granting the full triple lock hike is still his most likely option. The biggest question is what happens to the triple lock after the general election is over. Its long-term survival is far from secure.