Triple lock could be replaced by ‘more sustainable’ Australian option | Personal Finance | Finance
The triple lock mechanism was introduced in 2011, and the amount people receive a state pension has been increasing every year since then. However, it has been criticized as unsustainable and unpredictable. Institute for Financial Studies It claims it “disproportionately benefits better-off retirees.”
The think tank said it would “make sense” to move away from the triple lock and suggested a possible alternative known as ‘smooth earnings linking’, similar to the system currently used in Australia. He claimed this would provide greater stability and predictability that both the government and retirees could rely on.
The triple lock increases the state pension by the highest three figures each year:
- National wage increases
- Inflation
- 2.5%
This has allowed the state pension total to always remain above inflation, even during wild market fluctuations, such as during the pandemic. However, concerns have been raised about its longevity in times of economic instability, making it more costly and difficult to predict.
IFS noted: “Although the triple lock has helped improve retirees’ living standards over the last 15 years, a better approach is needed for the future.”
He recommended that the government consider proper earnings linkage, which would set a target for state pensions at the median full-time earnings level so that state pensioners average, rather than average, what a full-time worker in the UK receives.
If the state pension falls below this target, it can be increased in line with the wage increase. And if inflation rises above average earnings growth, then the state pension total will increase in line with inflation.
The think tank report suggested: “In most years when the state pension is at the target level and earnings are rising in real terms, the state pension will increase in line with average earnings growth. But in years when inflation rises above average earnings growth, the state pension will instead increase in line with inflation.”
“This inflation protection will continue as real earnings recover, allowing the state pension to return to the target fraction of average earnings.
“These features of the smoothed earnings link will mean that state pensions can both keep pace with rising living standards in the long term and provide protection against inflation in times of economic turmoil.”
