Why the government could freeze pensions in face of furlough wage rises

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Why the government could freeze pensions in face of furlough wage rises

The economic impact of the coronavirus will be very harsh on the UK, with a report from the Organisation for Economic Cooperation and Development predicting Britain will be worst affected out of all developed nations .

They predict the UK’s GDP will drop by 11.5 per cent overall in 2020, while a second spike in cases of Covid-19 having the potential to cause even more damage if it occurs.

The government has borrowed and spent billions to cope with the pandemic but there will come a time where the expensive schemes are ended and the treasury will need to work out how it puts the economy back together.

When that time comes the last thing chancellor of the exchequer Rishi Sunak needs is for his furlough policies to have created a massive increase in the amount spent on pensions, but that is exactly what he’s facing.

A combination of the way the triple-lock pension works and the way the impact the furlough scheme has had on wages is lining up a major issue for the government to deal with.

What is the triple-lock pension and why is it going to be a problem for the government?

The Claim

The main problem the chancellor faces with triple lock pensions is that his furlough policies have created an artificial dip in wages, meaning they will rise sharply once those policies end .

Workers on furlough only get 80 per cent of their pay, once the scheme is over and they return to 100 per cent it will represent a significant rise in wages.

Triple-lock pensions work on the basis that the state pension increases every year by the highest of three measures: wage rises, inflation or a rate of 2.5 per cent. Since the bounce back in wages is going to be so high it will be the metric which the pensions are increased by.

Sunak is facing calls to freeze the triple-lock on pensions for two years so that the bounce back in wages doesn’t lead to a large increase in the cost of pensions without scrapping the policy altogether.

The treasury has wanted to scrap the triple-lock on pensions for a long time, warning that an ageing population will lead to a rise in the number of pensioners over the next 20 years.

Keeping the triple-lock on pensions is very popular, particularly among those who are either on pensions or soon to need them, but it is a very expensive policy which the treasury worries the UK can’t afford in the long term.

The Counter Claim

However, the Conservatives promised to keep triple-lock pensions in their general election manifesto and prime minister Boris Johnson said the party would aim to meet all of their commitments “unless I specifically tell you otherwise”.

The Guardian reports government officials want to avoid spending a massively larger amount on pensions in a way that “does not screw pensioners”.

The chancellor denied that a decision to scrap the triple-lock had already been made but he faces a dilemma over what to do if he doesn’t want to end up paying a massive bill because wages rose massively after his furlough scheme artificially pulled them down.

The Times reports Johnson has told Sunak to keep safeguards in place for pensioners, but he has also indicated he doesn’t want to turn back to austerity to pay for the damage caused by the coronavirus.

Sunak’s options would appear to be somewhat limited. If he’s not able to scrap the triple-lock pensions and there won’t be major cost-cutting then a two-year freeze on pensions might be his only option.

The Facts

The Office for Budget Responsibility forecasts that millions of workers needing to move onto the furlough scheme during the pandemic has seen average earnings drop by seven per cent.

As millions of furloughed employees return to normal pay the OBR forecasts it would represent a wage rise of 18 per cent, meaning the rules of the triple-lock would put pensions up by 18 per cent.

A freeze on the triple-lock would need to last at least two years because the expected bounce back in wages would impact pension rises in April 2022.

The drop in earnings and low inflation this year means pensions are likely to rise by the basic 2.5 per cent in April 2021, the following bounce back in wages will lead to a massive rise for the following year.

A fiscal responsibility report published by the OBR in 2018 said the long-term cost of the triple-lock pension would keep rising until one per cent of national income was dedicated to paying for the rises by 2068, or about £20 billion a year in today’s money.

The triple-lock on pensions was introduced in 2010 by the coalition government as a way to protect pensions from being outstripped by rises in inflation or wages.

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Low wage growth and inflation over the past decade has meant the 2.5 per cent rise has been used often, resulting in pensions rising faster than wages.

The Conservative manifesto has reaffirmed the party’s pledge to protect the triple-lock pension at every general election since it was introduced.

Increases to the state pension come into effect each April, with calculations for the increase done at the end of each year.

The full state pension is currently worth £175.20 a week , though most pensioners are on the old pension of £134.25 a week and get topped up by pension credits. If the triple-lock had never been introduced the old pension would be paying £13.45 less each week at this point.

If the triple-lock stays in place unaltered then the full state pension would rise from £175.20 a week now to £212.45 a week by April 2022. That is a rise the government believes they cannot afford, what they do to avoid it remains to be seen.

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