Pensions to surge by 10pc as workers told to accept a pay cut

The triple lock plan was met with skepticism from some within government on Tuesday night.

A Whitehall source told The Daily Telegraph: “I think this sounds bonkers. If you are going to stick to the line on inflation, you have to show restraint across the board.

“People will start to see through the contradictions. If we confine ourselves to this gerontocracy, it obviously doesn’t have a very long lifespan.”

David Davis, the former Tory Brexit secretary, said: “We are not just facing inflation, we are facing stagflation, and the only way of defeating any aspect of it is encouraging high levels of growth in the private sector, which will lead to higher productivity.

“While it is perfectly reasonable to protect the poor, the government must encourage growth.”

Jonathan Cribb, associate director at the Institute for Fiscal Studies, said the policy is “unsustainable in the long run” and continues to put upward pressure on the public finances “in a way that is almost unpredictable for government”.

He added: “An inflation shock, such as this, which reduces the value of real wages: it tends to benefit both people on benefits whose incomes tend to go up in line with inflation and state pensioners. That’s the consequence of providing inflation protection. “

Former Treasury permanent secretary Sir Nick Macpherson said in a tweet: “If the real wages of those in work have to fall, as HMG and the Bank of England argue, this can only mean those in work having to pay more tax to fund the pension increase. “

It is also unclear how increasing benefits in line with inflation while warning against similar rises in pay helps achieve the Government’s public ambition of encouraging more people into work.

A rise of 10pc would add £ 18.50 per week to state pensions, or £ 962 annually, and increase the pensions bill by around £ 10bn.

For those on the full new state pension, their annual payments are set to top £ 10,000 for the first time or £ 21,000 for couples. That will cost the Treasury an estimated £ 10bn.

The average figure for a 10pc benefits rise is difficult to calculate, as it depends on an individual’s circumstances. But estimates suggest it could cost close to another £ 10bn.


What the pensions triple lock is and how it works

By Tim Wallace

The pensions triple lock was introduced in June 2010 by George Osborne in one of his first acts as Chancellor of the coalition Government.

The policy guarantees that the state pension rises every April by whichever is higher out of consumer price inflation the previous September, the annual rise in wages the previous July, or, if those are both low, 2.5pc. The idea was for pension increases to keep pace with the rising cost of living.

“Pensioners will have the income to live with dignity in retirement,” Mr Osborne said, with a jibe at Labor that “there will be no more 75p increases in the basic state pension.”

The idea was that pensioners’ incomes had been squeezed over time by inflation and the poor elderly needed a financial boost.

In the election campaign that year, the Lib Dems had argued “it is unfair that as each year goes by, pensioners slip further behind” workers, hence demanding a link between pensions and pay.

As a guarantee, it has had wobbles – in April this year the uprating was limited to the higher number between inflation or 2.5pc, as the distortions of Covid and the furlough scheme had sent pay spiralling by more than 8pc.

As a result the state pension rose by 3.1pc, in line with last September’s inflation.

This year the triple lock is back. Unless something dramatic happens with wages, which were up 6.8pc in the three months to April, inflation will be the highest indicator.

The Bank of England expects prices in the third quarter of the year – which includes September – will be up by at least 9.5pc.

For someone on the full new state pension of £ 185.15 per week, that will be a boost to £ 203.67, or from a little over £ 9,600 per year to almost £ 10,600 per year.

Next year’s inflationary hike also represents a major extra cost to the Treasury.

The total state pension bill is expected to come in at just over £ 110bn this financial year. A jump of 9.5pc will take that above £ 120bn.

Benefits such as Universal Credit and child benefit both went up by 3.1pc in April and can expect to rise by 9.5pc next year – they are linked to inflation, but do not have the wider boost which pensions get from the triple lock.

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