The UK’s controversial triple lock policy is once again making headlines, as recent earnings figures pave the way for a potential 8.5% increase in the state pension next spring. This follows a substantial 10.1% rise this April due to high inflation. While the triple lock aims to protect the real income of pensioners, concerns are mounting about its impact on government spending and the state pension age.
The Rising Costs:
Each percentage point increase in the state pension adds at least £1 billion to the government’s already hefty state pension bill, which currently exceeds £110 billion and constitutes roughly half of total spending on benefits. Official forecasts suggest this figure could approach £150 billion by the end of the decade, raising questions about the policy’s sustainability.
To address these concerns, the government has a crucial lever at its disposal—the age at which individuals can start claiming their state pension. While the state pension age is already set to rise from 66 to 67, there are legislative plans for a further increase to 68 between 2044 and 2046. However, the government aims to expedite this change, potentially moving it to 2039.
Jonathan Cridland, who led the last state pension age review in 2017, has cautioned that to prevent the state pension age from rising further, it might be necessary to reconsider the triple lock policy. He emphasised the importance of ensuring that pensioners not only receive a valuable pension but also have the opportunity to enjoy it during their lifetime.
The Dilemma: Waiting vs. Accepting Less:
As the state pension bill continues to escalate, an important question emerges: Is it better to delay receiving a larger pension or accept a smaller pension sooner?
In the upcoming tax year, the state pension is expected to cost £125 billion, according to the Office for Budget Responsibility. While pension spending is on an upward trajectory, there will be a temporary slowdown in 2026 as the state pension age climbs to 67.
Jonathan Cribb, from the Institute for Fiscal Studies, suggests that moving away from the triple lock and adopting an earnings indexation approach—still more generous than working-age benefits—might reduce the need for extensive state pension age increases. Each year the state pension age increases, the Exchequer saves approximately £5.5 billion, which is equivalent to 4.4% of the forecasted state pension cost for the next year.
The government faces a delicate balancing act in ensuring the sustainability of the state pension system. A sensible debate about intergenerational fairness and affordability is warranted as policymakers navigate these complex challenges.
It’s important to note that regional disparities in life expectancy can significantly impact state pension payments. Those in less affluent areas with lower life expectancies are likely to receive fewer in-state pension payments over their lifetimes. The state pension age increase from 65 to 66 in 2010, for instance, pushed one in seven 65-year-olds into income poverty, particularly affecting the most deprived areas.
The triple lock policy raises questions of intergenerational fairness. While scrapping it might ease the burden on younger workers funding the state pension system, raising the pension age could also have adverse effects on younger generations, compelling them to work longer while financing the triple lock for current retirees.
In a complex web of economic considerations, the UK government faces challenging decisions regarding the future of its state pension system.