Rishi Sunak is urged to drop pensions triple lock to avoid £4 billion increase to payments in autumn spending review that will seek to help UK recover from Covid pandemic
Rishi Sunak should ditch the pensions triple lock to avoid 'perverse' increases to payments as the country begins to recover from the Covid pandemic, a think tank warned today.
The Institute for Government said the Chancellor should abandon the Conservative manifesto pledge to avoid a £4billion payout.
The 'triple lock' commits ministers to increasing the pension by the highest of earnings, inflation or 2.5 per cent.
The economic chaos caused by the Covid-19 crisis means wage growth could be almost nine per cent this year, causing an additional fiscal headache.
In the report, IfG chief economist, Gemma Tetlow, said: 'Departing from the perverse triple-lock outcome would, technically, constitute a manifesto breach.
'However, choosing to do so and instead increasing pensions in line with ''underlying'' pay increases would maintain the spirit of the commitment, give a more reasonable outcome and save the Treasury £4billion a year.'
She added that tax rises were 'likely to be needed to meet ongoing costs of Covid as well as other government commitments' if Mr Sunak did not want to add to the Government's already eye-watering debt pile.
The Institute for Government said the Chancellor should abandon the Conservative manifesto pledge to avoid a £4billion payout.
Economists say the effects of furlough and the pandemic are warping wage growth figures, and average wage increases could reach 8 per cent by the quarter to July - which is used for setting the state pension
Average earnings growth in the three months to June 2021 was 8.8 per cent, which would lead to huge pension increases if triple lock remains in place
The Chancellor is weighing up ditching the pledge for this year only after the coronavirus pandemic skewed wage growth and left the Treasury facing a massive bill.
Earlier this month, Mr Sunak was said to be considering removing the wage growth element of the policy.
Inflation is estimated to hit around three per cent which would result in a significantly lower pension increase price tag of approximately £2.6billion.
The IfG report added: 'Average earnings growth in the three months to June 2021 was 8.8 per cent.
'If state pensions were to increase by this amount instead, they would cost around £4bn more in 2025/26 than was forecast in March.
'However, this figure for earnings growth is distorted by 'base effects': in 2020, average pay was unusually low because many workers were furloughed and receiving only 80 per cent of their salary.
'It is also distorted by ''compositional effects'': the people who have lost their jobs since 2020 have disproportionately been in low-paid jobs, which raises average pay among those still employed.
'The Office for National Statistics has estimated that ''true'' earnings growth, stripping out these effects, is between 3.5 per cent and 5 per cent.
'If the government were to stick to the letter of the triple lock, pensions would increase by something like 8.8 per cent next April.
'That would leave pensions in 2022/23 worth 11.5 per cent more in cash terms than in 2020/21. If the state pension had instead increased in line with underlying average earnings over that period, it would have risen only 7 per cent.'