Today’s figures from the ONS show that inflation in the year to September was just 0.5%. September is usually particularly important as the increase in prices over the year to that point is conventionally used in calculating how benefits and state pensions are to be uprated in the following April.

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For the basic state pension and the new state pension current Government policy is triple lock indexation, which means that payments increase by the greater of growth in prices, earnings, or by 2½%. With the current economic turmoil leading to earnings falling by an estimated 1% over the year to July, and with today’s inflation figure of 0.5%, then this would lead to state pensions increasing by 2½% next April. A full basic state pension would rise from its current £134.25 per week to £137.60, while a full new state pension – which those who reached state pension age since April 2016 can receive – would rise from £175.20 per week to £179.60.

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As shown in Figure 1 the basic state pension would rise from 18.4% of average earnings, which is already around the highest seen since April 1988, to 19.0% of average earnings which would be its highest share since April 1987. The new state pension would increase in value from 24.0% to 24.8% of average earnings. In real-terms both would rise further from their current record levels.

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Covid-19, and the triple-lock going forwards

In a goldilocks economy – not too hot, not too cold – one might expect inflation to be at target of 2% and for there to be sufficient productivity growth to result in nominal earnings growth of more than 2½%. In these years the triple lock would be no more (and no less) generous than earnings-indexation. However in periods of economic turmoil the triple lock is particularly generous to pensioners. This is because the value of the basic state pension and new state pension are protected when earnings growth is weak but, despite this, increase fully with any subsequent recovery in earnings. As a result the value of these payments would increase more quickly over time if the economy experiences periods of boom and bust rather than if the economy experiences consistent (but the same average) growth.

Earnings are forecast to bounce back reasonably strongly in the coming year as – hopefully – the severe and lengthy lockdown introduced in response to the pandemic does not need to be repeated. As a result the OBR forecast in July that over the year to July 2021 average earnings will grow by 5%. Under triple-lock indexation, the state pension would then increase in line with this bounce back in earnings in April 2022 and the boost to these payments in April 2021 relative to average earnings would be locked-in. The OBR estimates that in 2024–25 state pension spending will be £3.2 billion more than it would be were it indexed to earnings throughout this period. These state pensions would also be more generous in real terms than was forecast to be the case in March, as is shown for the new State Pension in Figure 2. This is despite the working age population now being expected to be poorer in 2024–25 than was expected in March.

The record of the triple-lock to date

This is far from the first time this rachet effect has occurred. The last eleven years have seen terrible growth in average earnings. As a result, under the triple lock earnings-indexation has – remarkably – only applied three times, with more generous than earnings-indexation set to apply eight times. As shown in the Table below, by next April this will mean the basic state pension will have increased by 41% over the last eleven years, compared to 25% if it had been indexed in line with inflation (as measured by the CPI) or by 22% if it had been indexed in line with earnings. (A double lock, of indexation in line with the greater of earnings or prices, as was proposed in the Conservatives 2017 manifesto but subsequently dropped as part of their deal with the Democratic Unionist Party, would over the entire period have implied an increase of 34% over this period.)

Read more: @IFS ORG