Hope for state pension triple lock as falling inflation could make system ‘more affordable’
The IFS argues there is currently no sense of what level the state pension will reach or when
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The state pension triple lock could become “more predictable and affordable” for future pensioners as consumer prices inflation starts to stabalise.
High inflation figures have continued to raise questions over the longevity and affordability of the state pension, which is paid for by today’s workers.
A new report has found the triple lock will cost households around £10billion extra a year by 2034, putting further pressure on taxpayers who could be forced to work longer to pay for the increase.
Annual spending on the state pension will soar past £150billion in real terms within the next decade, according to the Office for Budget Responsibility’s (OBR) latest long-term assumptions report for the economy.
Despite these figures creating a potential unsustainable burden on taxpayers, the inflation figures published today showing a fall to 2.3 per cent could spark hope for taxpayers about the future of the triple lock and alleviate these potential cost pressures.
The triple lock has resulted in a higher state pension and substantial additional government spending on the state pension over the last 13 years.
The state pension age could rise to 71GETTYUnder the triple lock, the state pension increases each year depending on the highest of price inflation, earnings growth or a minimum rate of 2.5 per cent.
Steven Cameron, pensions director at Aegon, explained that if earnings growth figures are used to determine next year’s triple lock figures, the following years could become “more affordable and predictable”.
Cameron argued that if price inflation stays low and earnings growth also gradually falls back, it will be less costly for the next Government to commit to maintain it for a further five years.
He added: “We may see lower rates of increases, but in times of lower inflation, the state pension doesn’t need to increase by as much to allow pensioners to maintain living standards.
“However, rather than a three-way comparison year on year, we’d recommend averaging the earnings component over a three-year period, which could smooth out excessive volatility and help ensure intergenerational fairness.”
The Institute for Fiscal Studies (IFS) has previously estimated the triple lock could “easily” cost anywhere between an additional £5billion and £40billion per year in today’s terms by 2050.
The OBR assumes that the triple lock will add just over 0.5 per cent a year to the annual increase in pension payments, based on how they have increased over the past three decades.
The triple lock will ensure the 4.3 million pensioners who currently receive the full state pension see a real weekly uplift of around £50 a week by 2034.
This is around £11.30 per week higher than if the state pension rose in line with average wage growth – as was the case previously.
This April, the earnings growth in 2023 produced an inflation-busting 8.5 per cent increase. In April 2023, a spike in inflation the previous year led to a record-breaking 10.1 per cent boost to the state pension.
Cameron explained increases under the triple lock create uncertainty for future generations.
He said: “With inflation having now fallen below the 2.5 per cent underpin, it’s likely to be earnings growth that determines next year’s Triple Lock increase, as the latest figures have this sitting at 5.7 per cent (for January to March 2024).
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“The specific figure used for determining the Triple Lock will be the year-on-year increase in earnings for the period ending May to July 2024, which will be published in September.
“Barring a significant drop in earnings growth over the next few months, this figure will likely determine next year’s triple lock.”
The International Monetary Fund, OECD and IFS have urged the Chancellor Jeremy Hunt to scrap this policy and base the future state pension increases on earnings or increases in the cost of living as this will make it sustainable.
Carl Emmerson, deputy director at the IFS, said keeping the policy could force people to work longer: “One key problem with the triple lock is the uncertainty that it generates – both for the public finances and for what the level of the new state pension will be in future relative to average earnings.
“A clear risk is that if the triple lock pushes up spending on state pensions towards a level that is deemed too high then it could lead to additional increases in the state pension age. This would particularly hit those with poorer health who struggle to remain in paid work until they reach the state pension age.”
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