State pensions are going up by £550 – here’s why the triple lock has nothing to do with it

The state pension has to go up with average earnings by law – unless the Government were to change this

“Pensioners will get more money next year thanks to our commitment to the triple lock.”

This is the post that Chancellor Rachel Reeves made on social media platform X this morning.

She is referring to the pre-Budget announcement that the Government will increase the full new state pension by an above-inflation figure of £550 per year from next April.

The figure is in line with average earnings growth this summer, and under the Government’s triple lock pledge, the state pension rises by the highest of average earnings growth, inflation, or 2.5 per cent every April.

At 4.8 per cent, earnings growth was the highest and so this is the amount the state pension will go up by next spring.

The Government has committed to keeping the triple lock – in place since 2011 – for the remainder of this parliament.

But contrary to what the Chancellor has said, even if the Government had abandoned the triple lock, the state pension would still have gone up by the same amount next year.

The triple lock itself is a commitment – non-binding in legislation – but there is also a set of rules written into law about the state pension.

According to legislation that was announced in 2007 and came into law in 2011 – pensions have to increase each year in line with average earnings, regardless of whether the Government sticks to the triple lock commitment or not.

The alternative would be the Government over-riding or changing existing legislation.

In other words, the triple lock only really comes into effect when average earnings growth is below inflation or 2.5 per cent.

Triple lock becomes a challenge when wages and inflation yo-yo

In recent years, there have been concerns raised about the sustainability of the triple lock because it pushes state pensions upwards, which in turn increases costs for taxpayers.

This means that over time, taxes have to rise to continue funding it unless the economy grows at a similar rate, which is why many MPs have privately suggested the lock should be dropped.

But actually, in a well-functioning economy which is operating as it should for working people too, funding increasing state pensions should not be as big a problem.

If inflation is running at around 2 per cent – the Bank of England’s target level – and average earnings grow at 2.5 per cent – people’s real terms income is increasing slightly every year.

This means the state pension would simply rise in line with working people’s earnings each year.

What has posed the problem for the sustainability of the state pension in the past half-decade is yo-yoing earnings growth and inflation.

In 2023, for example, the state pension grew by a whopping 10.1 per cent, because inflation stood at that level the previous September. Workers saw wages grow at a far lower rate.

The following year, inflation was far lower, but earnings rose by 8.5 per cent, in order to help workers partly catch up with growing costs.

Pensioners got that increase as well, even though their pensions had initially risen with inflation when workers had not.

The compounding increases they benefited from posed problems that would not exist if there were a single earnings-linked lock on pensions.

What is clear is that if inflation and average earnings can settle at more steady and sustainable numbers, the triple lock itself will become less of a problem than it currently is for the public finances.

Just how likely is that sustainability? We may get a bit of a glimpse on Wednesday.