The triple lock can’t last forever. Here’s what can replace it

The state pension triple lock “has to stop” and should be replaced with a system where it is pegged to a fraction of average earnings, one of the UK’s most respected economists has said. Paul Johnson, the former director of the Institute for Fiscal Studies (IFS) think-tank, said that politicians had to stop pretending that the mechanism “can carry on forever” and warned that without change it would end up consuming the British economy. Under the triple lock, the state pension rises in line with whichever is highest of inflation, wage increases or 2.5 per cent. Shorts The policy has ended up being much more expensive than it was expected to be when it was introduced by Conservative chancellor George Osborne in 2011, with the Office for Budget Responsibility (OBR) forecasting that by 2030 it will cost £15.5bn a year – three times its original estimate. The OBR predicted in July that when combined with the UK’s ageing population, the triple lock will push up spending on the state pension from its current level of 5 per cent of gross domestic product to 9 per cent by 2075. Concerns about the affordability of the pledge are felt across the political system. However, most of the main parties have shied away from calling for its reform because of the fear of an electoral backlash from pensioners – the age group consistently most likely to vote. At the start of July, Burnham recommitted to Labour’s 2025 general election promise to keep the triple lock for the whole of this Parliament, which could last until 2029. “I appreciate there’s a lot of debate about this but it is important that the commitment in the manifesto stands,” he said. Johnson previously led the IFS between 2011 and 2025 and is now provost of Oxford University’s Queen’s College. Speaking to The i Paper, he said that the triple lock had “turned out to be significantly more expensive than it was ever expected [to be]” because in the “weird 15 years since it was put in place” inflation had proved to be much more volatile than in previous decades. Johnson went on: “Clearly it has to stop at some point because it is just a permanent upward ratchet. “Logically, if you carry on with this forever, it will take up the entire economy.” Economist Paul Johnson CBE is the former head of the IFS and now provost of The Queen’s College, Oxford University (Photo: Kirby Jones) Johnson said that the best solution would be for the country to “take a view on what level do we want the [state] pension to be… what level do we want it to be as a fraction of average earnings?” Currently, the new state pension, which pays around £241.30 a week, sits at about 30 per cent of median full-time earnings, which stand at around £39,039. Johnson said that Parliament should come to a cross-party agreement on what an appropriate percentage would be. He suggested 33 per cent might be the right figure. “A third sounds about right,” he said. “Let’s just keep the triple lock until it gets [to that percentage]. At that point, say, ‘look, we’ll keep it at that fraction of average earnings’. There would be some caveats in the new system, he said. “In years when prices go up quicker than earnings, we will put it up in line with prices,” Johnson said. “But then sort of bring it back again when earnings go faster than prices, so it basically stabilises at a third of average earnings… or whatever number we agree to, rather than pretend that this can carry on forever.” The system outlined by Johnson is known as a “smoothed earnings link”, and is already used in Australia. Under the policy, in years where inflation exceeds earnings growth, pensions rise in line with prices temporarily. However, when growth in earnings rises back above inflation, the pension is uprated in line with inflation until its value has returned to the same percentage of average earnings. The Resolution Foundation – which also backs a smoothed earnings link – has calculated that switching to such a system from next year would result in a saving of around £650m in 2029-30 that would continue to grow over time.