As the Office for National Statistics prepares to release its estimate for average earnings growth, the IFS issues a warning about the cost of the triple lock to taxpayers.
Next week the ONS will reveal how much earnings have grown in the UK between May and July 2023 compared with the same months in 2022.
This figure is expected to determine next April’s increase in the state pension for the UK’s 12 million pensioners, as it is typically used as the measure of earnings for the pensions triple lock, and because it is likely to be more than 2.5 per cent and the CPI inflation in September.
The IFS said its analysis showed the state pension triple lock has by now raised public spending by about £11bn a year compared with what spending would be if the pension had rose in line with either prices or earnings since 2010.
The IFS report The triple lock: Uncertainty for pension income and the public finance includes “for a plausible range of outcomes” showed maintaining the triple lock could increase spending by anywhere between a further £5bn and £45bn per year (in today’s terms) by 2050.
Heidi Karjalainen, one of the authors of the report and a research economist at IFS, said: “The triple lock makes it especially hard to know how much you might receive from a state pension and how much the state pension will 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. This would particularly affect people with poorer health who struggle to remain in employment until they reach state pension age.”
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The IFS report, part of the Pensions Review in partnership with the abrdn Financial Fairness Trust, found that:
● The new state pension, which most people approaching the state pension age will receive in full, is now worth as much as a share of mean full-time earnings (25 per cent) as the basic state pension was when price indexation was introduced and the link between the basic state pension and average earnings was broken in 1980.
● If the triple lock had not been in place since 2011, but instead the state pension rose in line with inflation - which has been slightly higher than earnings growth - a full new state pension would now be worth around £180 per week, 11 per cent less than its current value of £204 per week.
● The counterpart to this is considerably higher state pension spending. The 13 years of triple lock has increased state pension spending by £11bn per year relative to either price or earnings indexation.
● The triple lock generates considerable uncertainty for individuals regarding the state pension they might receive in the future. A reasonable range (occurring 80 per cent of the time) for the value of the state pension in 2050 is between 26 per cent and 32 per cent of mean full-time earnings. In today’s terms, this would mean a range of £10,900 to £13,400 per year – a difference of £2,500 per year. This uncertainty about the value of the state pension makes it harder for people to plan for retirement.
● The uncertainty about the future level of the state pension means there is also significant uncertainty in the future cost of providing the state pension. The triple lock might increase the cost of providing the state pension to such a great extent that it could also lead to other reforms to control spending, such as a much higher state pension age, which would be especially disadvantageous to low income and less healthy people approaching pension age.
