The British government is being urged to abandon its pensions “triple lock” or face growing pressure on the public purse.
The Organisation for Economic Co-operation and Development (OECD) said in a report published on Wednesday that the practice of indexing annual pension increases to the maximum of earnings growth, interest rates or 2.5% would put growing pressure on the UK at a time when public debt is already above £2tn ($2.6tn).
“Population ageing is putting pressure on public finances,” the OECD wrote in its United Kingdom Economic Survey 2020. “Indexing state pensions to average earnings rather than using the ‘triple lock’ (the maximum of earning growth, inflation and 2.5%) would improve sustainability.”
The Conservative Party introduced the pensions triple lock in 2010 and the policy has been a cornerstone of its pitch to older voters ever since.
The policy was expensive prior to the COVID-19 crisis but experts warn costs could spiral as the result of the pandemic.
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Think tank the Resolution Foundation predicted in June that state pension contributions could rise five times faster than earnings over the next two years. Professor Philip Booth, a senior academic fellow at the Institute of Economic Affairs, told MPs the triple lock “could cause total chaos” in the coming years.
Senior MPs from within the Tory Party have suggested at least suspending the pensions triple lock during the coronavirus crisis. The government has so far resisted calls to modify the policy.
The OECD urged a rethink of the policy as part of its advice on how the UK can tackle its rising debt burden.
“In responding to the COVID-19 crisis, the public debt-to-GDP ratio will reach a historically high level, despite low interest rates, and a structural deficit is likely to emerge,” the OECD wrote in its sweeping report, which was last published in 2017.
UK debt has surged to more than £2tn in recent months after a borrowing binge by the government to pay for its pandemic response.
“Once the recovery is firmly established, addressing the remaining structural deficit and putting the public debt-to-GDP ratio on a downward path should come to the fore,” the OECD wrote.
“Pension reforms should ensure that adequate support is provided to poorer pensioners. Once growth has firmed, broadening the tax base would support social objectives, such as health, while raising equity.”
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