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How does the new triple lock work?

Institute for Fiscal Studies

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The government has announced a major change to the state pension triple lock. The new system will continue to protect pensions against inflation and guarantee increases of at least 2.5%, but changes how increases in earnings feed through into the state pension over time.

So how will the new triple lock actually work? Why did the existing system create a “ratchet effect” in pension spending? How does the new approach address that problem, and what role does the 2.5% guarantee still play?

Helen Miller is joined by IFS economists Jonathan Cribb and Heidi Karjalainen to explain what is changing, what it could mean for pensioners and the public finances, and the questions the reform leaves unresolved.

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00:00 - Introduction
2:40 - What is the 'old' triple lock?
6:30 - What is 'new' triple lock?
11:20 - Are pensions being cut?
13:57 - What is the cost of the 'new' triple lock?
16:10 - Does it save money?
17:45 - Can it pay for social care?
20:20 - Was there a better proposal?
22:45 - Does the 'new' triple lock benefit pensioners?
27:10 - Conclusion

20 Comments

@InstituteforFiscalStudies Creator 1 day ago (edited) Pinned

Thank you for listening, please like, subscribe and share it with anyone who might be interested. To sign up to our live event, visit: https://ifs.org.uk/events/ifs-zooms-live-look-ahead-budget

To read our explainer on the new triple lock, visit: https://ifs.org.uk/articles/how-will-new-triple-lock-work-and-what-effects-will-it-have

Timecodes:

00:00 - Introduction
2:40 - What is the 'old' triple lock?
6:30 - What is 'new' triple lock?
11:20 - Are pensions being cut?
13:57 - What is the cost of the 'new' triple lock?
16:10 - Does it save money?
17:45 - Can it pay for social care?
20:20 - Was there a better proposal?
22:45 - Does the 'new' triple lock benefit pensioners?
27:10 - Conclusion

@Scouser22 1 day ago

Thanks. I now understand it. The main media explanations are uniformly bad at this. It sounds entirely reasonable.

@Supernova_2244 1 day ago

Well, I was confused, but this video helps clear up my confusion. Thanks

@Thegiggleofsteel 1 day ago

Imagine a job that said, we'll guarantee inflation or minimum 2.5% payrise each year, there would queues out the door and round the block in any industry. Good for Burnham tackling something so politically charged.

@paulmonkcom 20 hours ago (edited)

The triple lock must remain to protect vulnerable pensioners who live solely from their state pension and benefits. There is however a more worrying imbalance within private pensions and that is the tax relief that unfairly subsidises the more wealthy people who pay tax at the higher rates. Restricting pension tax relief to the basic rate of income tax might raise around £14.5 billion of additional revenue per annum. Not that the government needs the money, tax relief on pensions just needs to be fair. There is no shortage of money, the government creates money when it spends into our economy, the Bank of England supply the money requested to the government on demand. GOVERNMENT DEBT = PRIVATE WEALTH. With our own sovereign currency and under 1% in foreign liabilities, the UK government and the Bank of England can always pay it's debt. Sadly though, above all else there is always plenty of money for war.

@CodekGaming 16 hours ago

Could someone explain why specifically 2.5% was chosen as the amount for the 3rd rule in the triple lock? Was it arbitrary? Or is there some connection to another figure like the 2% inflation target? I could understand why it's in there but I don't get why 2.5 was chosen vs any other number

@salvadorsumohano5750 20 hours ago

the grey shaded area in 8:30 should run from the end of year 2 to the end of year 5, not from year 4 to year 6. The plotted earnings line shows 1% annual earnings growth over that period, before returning to 4%. The note should therefore say: “Assumes inflation of 2% and average (nominal) earnings growth of 4% in all years, apart from the period from the end of year 2 to the end of year 5, when it is 1%.”

@SamW-p6l 1 day ago

Hi, at 9-10mins, you show the graph, but it looks like from year 2 that average earning fall below inflation, but you only show the grey box for years 4-6.

Could you just explain why, after year 2, earning growth and the old triple lock diverge?

@Simon-zb6fp 23 hours ago

One week before the Budget? I would have preferred something one week after the budget when you have worked out what it all means rather than speculation on what it might contain.

@MrKlawUK 22 hours ago

I wonder if the thinking around 2.5% is just to avoid arguments that its too many locks being removed too quickly. If they don’t expect inflation significantly below 2.5% in the medium term then functionally its likely the same as just ‘inflation or earnings’ but verbalising the additional 2.5% floor helps soften the message

@Suspended4thYT 1 day ago

My main concern is that this won't be implemented until 2030. And by then, who knows who will be in govt. We could end up back in the cycle of governing parties doing their best to retain the vote of existing pensioners, whilst those of us reaching pension age, have to wait until we turn 70. If this change can help negate that possibility, then it should be adopted now - manifesto or not.

@StephenWelling-fq1co 17 hours ago

Very good.

@deanunio 19 hours ago

Encourage everyone to look up the superannuation system in Australia. Even if the UK started now could be massive in 20-30 years and if there was some requirement to invest in Britain and its companies and infrastructure could really help with investment in British assets

@petearmstrong2778 22 hours ago

I never understand why examples are not prepared across say 20 years with all parameters showing Triple Lock 1.0 vs Triple Lock 2.0. If pensioners can see the results and the media/politicians, it is much easier to understand. Some figures will be assumptions but you could create scenarios to show all cases.

@davidlumb5836 1 day ago

Can we put a comparison against working age and sickness benefits to see what the difference is.

@hyperpedro2868 1 day ago

Good video. It is still a pretty generous indexation while making the system sustainable in the long run, which is not possible with the current triple lock. The extra spending they expect is just bollocks on the other hand.

@jimballantine4408 1 day ago

Does this modelling take into account all increases in the state pension will be taxable?

@LeeFlemingster 1 day ago

I disagree that the problem with the triple lock is unpredictability. If pensions increase by the higher of, 2.5%, average wages or inflation, then it will outpace all 3. That's the problem.

@johnleech192 1 day ago

State age pension is not even a quarter of mean earnings. This means on retirement many people have to drastically reduce their spending/lifestyles. It’s not really generous in this context….

@aficio698 1 day ago

I think you have overlooked one important thing.
An election campaign on the back of a death tax, meddling with the triple lock and increasing taxes will be a hard sell.
The final nail has been driven into the Liebour coffin