Triple lock could add £45bn a year to cost of state pensions finds new research

Increases in the state pension will cost taxpayers up to £45 billion a year by 2050, a think tank has warned, adding pressure on ministers to raise the official retirement age.

New research by the Institute of Fiscal Studies (IFS) found that since the pensions “triple lock” was introduced in 2010, it had increased pensions by 60 per cent — 20 percentage points more than if pensions had increased by average earnings over the period.

It warned that such rises could become unsustainable in the longer term and force the government to increase the state pension age to control spending.

The triple lock was introduced by the coalition government and guaranteed that pensions would rise each year by the rate of average earnings, inflation or 2.5 per cent — whichever was higher.

The IFS research found that since then, this had resulted in the average state pension rising by 60 per cent since 2011. If pensions had only been linked to inflation they would have risen by 42 per cent and if they had been linked to earnings they would have risen by 40 per cent.

The think tank said this had resulted in the current £204 weekly pension payment being £24 more than it would have been if the triple lock did not exist.

The findings come ahead of new figures from the Office for National Statistics of earning growth for the three months to July 2023.

This is likely to show earnings outstripping inflation for the first time since 2020 and will be used to determine next April’s rise in payments for the UK’s 12 million pensioners.

The report said data covering April to June 2023 showed annual earnings growth of 8.2 per cent — higher than the current 6.8 per cent rate of inflation.

The IFS said that while the triple lock had been successful in restoring the value of pensions to around 25 per cent of average full-time earnings — a figure last reached in 1980 — it posed significant problems for the government in the longer term.

Its analysis found that the triple lock could potentially increase spending by anywhere between a further £5 billion and £45 billion per year, in today’s terms, by 2050.

The IFS warned that this could force future governments to raise the retirement age to curtail spending in a way that would discriminate against pensioners in poor health.

“The triple lock could lead to the state pension in its current form becoming sufficiently expensive that policymakers respond by implementing reforms that they would not otherwise have done, to reduce spending on the state pension,” it said.

Heidi Karjalainen, one of the authors of the report and a research economist at the IFS, said the triple lock also made it difficult for workers to predict how much they might receive from a state pension and how much it would cost the state in the future.

“An additional real risk is that retaining the triple lock for too long increases state-pension spending so significantly that it leads to insurmountable pressure for a much higher state pension age,” she said.

“This would particularly affect people with poorer health who struggle to remain in employment until they reach state pension age.”

The report comes after The Times revealed last month that the government would spend more on pensions in two years’ time than on education, policing and defence combined.

Last year, pension costs increased by £6 billion to £110 billion. By 2025 they are expected to have ballooned to £135 billion, a figure £2 billion more than the combined day-to-day budgets for the Department for Education, the Home Office and the Ministry of Defence.

Read more:
Triple lock could add £45bn a year to cost of state pensions finds new research