Putting a temporary pause on the state pension triple lock and bringing it back in 2022-23 would help the Government save £15bn in just two years and protect the income of senior citizens, according to new research.
The projected £322bn budget deficit has stoked fears Chancellor Rishi Sunak is considering breaking a key Tory manifesto pledge and moving from a triple lock to a “double lock” to cut public spending.
The triple lock ensures state pensions increase in line with the highest of wage growth, inflation or 2.5pc. Think tanks including the Social Market Foundation have said removing the 2.5pc promise and moving to a double lock based on wage growth or inflation would save £20bn over five years.
But a report from the research group the Pensions Policy Institute has found the effect of a "double lock" policy would be negligible in the short term. A spike in inflation or wage growth of 2.5pc or more would make the it just as costly as the current system.
Forecasts suggest wage growth and inflation will spike next year if the sharp economic downturn is followed by a strong recovery. Businesses will reopen and people who were previously out of a job return to work.
This led to concerns the Conservatives would be forced to go-back on a commitment to keeping the triple lock because of volatile earnings. The furlough scheme has depressed earnings in 2020, meaning wage growth next year will be exceptionally high as it unwinds and salaries return to normal.
Figures from pensions firm AJ Bell said using the 2021 earnings increase to upgrade state pensions in 2022 would cost the Government an additional £10bn.
The PPI instead proposed introducing a temporary “smoothing mechanism”. This would reduce the current cost of the triple lock, some 4.1pc of GDP, and reduce risk of a future spike in inflation or wage growth adding billions to the pensions bill.
It said increases in the state pension could be based on average wage growth over the past two years, with the short-term measure brought in for one year and the triple lock reinstated in 2022-23.
The saving of these temporary policy measures would amount to £15bn, helping the Government to reduce its forecast Covid-19 spending bill from £192bn to £177bn, the report said.
It would mean pensioner income rising more slowly than under the triple lock, but faster than under a new double lock system. It would also mean the Government would not be forced to go back on its manifesto pledge, the PPI said.
Former pensions minister Steve Webb, now of consultancy LCP, said any changes may require changes to legislation.
“Low inflation and volatile earnings are the two big problems here,” he said. “I signed the law that says pensions have to go up if wages increase and it might take an act of Parliament to make these changes.
"But it does make sense to be looking at this over the next two years and over the long term. The triple lock was designed to function during normal times, but these are certainly not normal times.”