UK Pension Triple Lock Ensnares Workers in Vicious Circle of Higher Taxes

Strategic Insights -

The UK pension triple lock guarantee is ensnaring the country in a vicious circle of higher taxes to benefit pensioners, according to a thinktank. The triple lock, introduced in 2010, ensures state pension rises each April, tied to the highest of total earnings growth, CPI inflation, or 2.5%. Industry figures and thinktanks, including the Institute of Economic Affairs (IEA), have subjected the mechanism to scrutiny, warning of potentially huge tax rises for UK workers.

Key Takeaways:

  • The pension triple lock has been criticized by the IEA for being "three times as expensive as the Office for Budget Responsibility (OBR) expected" when introduced in 2010.
  • Pensioners are set for a 4.8% increase in the state pension next year, following the release of figures from the Office for National Statistics (ONS).
  • Total wage growth, including bonuses, for the quarter to July was 4.8%, which is expected to be the primary figure used for next year's pension rise.
  • The state pension has grown sharply as a share of earnings, resulting in working-age people paying higher taxes to support retirees.
  • The result is a vicious cycle, with the state pension set to grow faster than average earnings and working-age people facing increased tax burdens.
  • The UK population is projected to become significantly older between now and 2070, exacerbating age-related costs, which are set to increase to around 11 percentage points of GDP (£200 billion per year).
  • Implementing change to the pension triple lock mechanism is unlikely without a broader vision that addresses concerns of voters at or approaching retirement age.

Statistics:

  • The state pension is set to increase by 4.8% next year.
  • CPI inflation for September was 3.8%.
  • Total wage growth, including bonuses, for the quarter to July was 4.8%.
  • The population is projected to become significantly older between now and 2070.
  • Age-related costs are set to increase to around 11 percentage points of GDP (£200 billion per year) by 2070.

Sources:

  • The Express
  • Tom Clougherty, executive director of the Institute of Economic Affairs (IEA)
  • The Office for Budget Responsibility (OBR)
  • The Office for National Statistics (ONS)