The UK government’s pensions “triple lock” could wreak havoc with public finances in coming years, a top economist has warned.
Professor Philip Booth, a senior academic fellow at the Institute of Economic Affairs, told MPs on Tuesday the triple lock “could cause total chaos” in the coming years, as real earnings collapse and then recover.
The pensions triple lock was introduced in 2010 and links annual increases in state pensions to real earnings. Each year pensions rise either by inflation, earnings growth, or 2.5% — whichever is higher.
Professor Booth warned that a looming collapse in earnings growth due to COVID-19, followed by a potential rapid bounce back, could create a huge headache for the government. Surging earnings growth would mandate big increases in the state pension, leading to spiralling costs.
“There are no really easy ethical options here,” Professor Booth told MPs on the Treasury Select Committee on Tuesday.
“Promises have been made to future generations for which nothing was set aside. You’re in the position of either reneging on those promises, reducing spending in other areas, or taxing future generations at very high rates.”
Professor Booth said the UK was facing a demographic “crisis” that has been “ignored” by politicians for a generation. He said there was “no justification whatsoever” for the triple lock.
“The wrong ethical decisions have already been made and the question is how you manage this problem prudently going forward,” he said.
Think tank the Resolution Foundation warned in June that pensions contributions could rise five times faster than earnings as wage growth collapses due to COVID-19. That same month Mel Stride MP, chair of the influential Treasury Select Committee, called on the government to “temporarily” freeze the triple lock.
The Financial Times reported earlier this year that Chancellor Rishi Sunak was considering scrapping the triple lock on affordability grounds. However, a Downing Street source told Yahoo Finance UK at the time there were “no plans” to abandon the triple lock.
Booth’s comments came amid a discussion about UK taxes post-coronavirus. Top economists who gave evidence to the committee said future tax rises were likely. UK debt passed £2tn ($2.6tn) last month, surpassing 100% of GDP for the first time since the 1960s.