‘Triple-lock’ set to drive £23 billion increase in state pension spending

• ‘Baby boomers’ retiring coupled with the rising cost of the ‘triple-lock’ is expected to increase state pension spending by £23 billion by 2027/28 compared to the start of the decade, Office for Budget Responsibility analysis published today shows (Fiscal risks and sustainability, July 2023 – CP 870 (obr.uk))
• Current state pension bill is around £124bn a year
• The triple-lock guarantees the state pension rises by the highest of average earnings growth, inflation or 2.5%
• Higher inflation expectations have increased the projected long-term extra cost of the triple-lock versus an earnings-linked state pension increase from 0.47 percentage points to 0.58 percentage points
• If inflation follows the Bank of England’s expectations and the triple-lock is retained for the next Parliament, the state pension could be worth over £13,000 a year by 2030
• However, if inflation is stickier than expected, the state pension could rise to over £14,000 a year by the end of the decade
• The triple-lock remains fundamentally unsustainable – but politicians fear angering older voters if they abandon the pledge

Tom Selby, head of retirement policy at AJ Bell, comments:

“Spiralling inflation has been squeezing household budgets for the best part of two years now. However, the ‘triple-lock’ has helped shield retirees from this pain, with the state pension rising by a whopping 10.1% in April this year, in line with CPI inflation in September 2022.

“With neither the Conservatives nor Labour wanting to risk alienating older voters, both parties are expected to stick with the pledge in their respective election manifestoes. If that happens, the state pension will continue to increase by the highest of average earnings growth, inflation or 2.5% through until 2030.

“If inflation between now and 2030 is in line with official projections, this could see the full flat-rate state pension increase to over £13,000 a year by the end of the decade. However, if inflation is higher than anticipated and sticks around for longer, this figure could spiral to well over £14,000 a year.

“This state pension protection is understandably popular among retirees but comes at a significant cost to the Exchequer, with the OBR estimating the cost of paying state pensions will be a staggering £23 billion higher in real terms by 2027/28 than it was at the start of the decade. To put that figure in context, the OBR puts the current annual cost of the state pension around £125bn, so the increased spend courtesy of the triple-lock represents a massive increase in both absolute and proportional terms. Those rising costs will put pressure on current and future governments to either raise taxes, cut spending in other areas or find savings from the state pension system – possibly through a faster increase in the state pension age.

“While committing to the triple-lock might be viewed as the easy option politically for now, at some point, someone will have to be brave enough to admit this cannot go on forever. If it did, the state pension would eventually be worth more than average earnings.

“The existence of the triple-lock is essentially a tacit admission by the government that the state pension is too low. Rather than randomly ratcheting up the value of the state pension, it would make far more sense for the government to set out what it believes a decent state pension is worth, and then steadily increase the value of the state pension to that level.

“Unfortunately, the triple-lock has essentially shut down sensible debate about state pension increases, with politicians seemingly happy to support the promise blindly in order to avoid a potential scrap with older voters.”

How the state pension could hit over £14,000 a year by 2030:

Scenario 1: Expected inflation - Inflation in line with Bank of England projections

Scenario 2: Higher inflation - Inflation slightly higher than Bank of England projections

Scenario 3: Much higher inflation - Inflation significantly higher than Bank of England projections

Assumptions: Bank of England CPI inflation projection for Q3 of the previous year used for ‘triple-lock’ in 2024, 2025 and 2026. From 2027 onwards, inflation target of 2% used. Average earnings growth assumed at below inflation or 2.5% throughout all three scenarios.