The State Pension could rise by 21.3 per cent over the next two years if the UK economy recovers rapidly once the Covid-19 lockdown ends.
New analysis by AJ Bell shows government pension costs could ballon if forecasts from the Office of Budget Responsibility are correct.
The OBR predicts a 7.3 per cent fall in average earnings over 2020, followed by an 18.3 per cent increase in 2021, as the economy recovers. It is also forecasting inflation will stand at 1.2 per cent for 2020, before creeping up to 2.3 per cent the following year.
However, under the terms of the triple lock the state pension will rise by whatever is higher: inflation, average earnings, or 2.5 per cent. This could see an inflation-busting 2.5 per cent increase in 2021, followed by an 18.3 per cent increase in 2022 — a total of 21.3 per cent over two years.
This would see the benefit rise from £175.20 a week to £212.45.
AJ Bell points out that if the state pension was linked to average earnings only it would increase by only 9.7 per cent over two years. This would equate to a rise to just £192.15 a week.
However if pension payments are linked to inflation only, there would be just a 3.5 per cent rise to £181.40 by 2022.
AJ Bell senior analyst Tom Selby says: “The devastating impact of Covid-19 on the UK economy could dramatically increase the cost of the Government’s state pension ‘triple-lock’ manifesto pledge over the next two years.
“The triple-lock is meant to provide a relatively straightforward underpin to people’s state pension incomes. However, it simply wasn’t designed for a world where inflation or earnings are veering so wildly from one year to the next.
“The implications this could have on the cost of the triple-lock over the next two years are astronomical and it is hard to see a way Boris Johnson can stand by one of his key election promises.
“Based on previous OBR costings and its own estimates for inflation and earnings, retaining the triple-lock for 2021 and 2022 would cost over £22 billion more than a straight average earnings link, and a staggering £34 billion more than if it were only protected in line with inflation.
“The Government has two options open to it: carry on with the state pension triple-lock and create a colossal chasm in the public finances, or revisit the policy and risk the wrath of millions of pensioners.”
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