Overview
In this report, The IFS first discusses how the triple lock has led to an increased level of the state pension, thereby increasing state financial support to pensioners at an increased cost to the government, over the last 13 years. Researchers then present new analysis showing how the nature of the policy creates uncertainty around the level of the state pension for both current and future generations of pensioners.
Key findings
1. On Tuesday (12 September), the Office for National Statistics will release its estimate for average earnings growth over the three months from May to July 2023 compared with the same months in 2022. It is this figure that is typically used as the measure of earnings for the pensions triple lock and, because it is likely to be above both 2.5% and CPI inflation, it will probably determine next April’s increase in the state pension.
2. Since its introduction in 2011, the triple lock has increased the value of the state pension and the cost to the government of providing it. State financial support to pensioners is now greater as a result of the triple lock. Had the value of the state pension grown in line with either prices or earnings since 2011, it would now be around 11% lower than it is – a full new state pension would be worth around £180 per week, compared with the actual current amount of £204 per week. Compared with the state pension rising in line with prices or earnings, the government now spends an additional £11 billion per year on state pensions as a result of the triple lock.
3. The triple lock creates significant uncertainty regarding the state pension people might receive in the future. A full new state pension is currently equivalent to 25% of full-time mean earnings. If the triple lock is kept in place indefinitely, a reasonable range (occurring 80% of the time) for the value of the state pension in 2050 is between 26% and 32% 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 in today’s terms.
4. This uncertainty over the value of the state pension makes it harder for people to plan for retirement. Generating an income that would make up an additional £2,500 per year from state pension age (at 68) would cost at least £50,000–£60,000 today (and more in the future). An additional concern is that the triple lock increases the exchequer cost of providing the state pension to such a great extent that it leads to other reforms to control spending. Perhaps the most likely of these would be even greater increases in the state pension age, which would hit harder those who anticipate 3 The triple lock: uncertainty for pension incomes and the public finances being in poorer health, are less able to remain in paid work, and are less likely to enjoy a retirement that stretches into older ages.
5. The triple lock also generates considerable uncertainty for the future level of public spending on the state pension. Based on our calculations, a reasonable estimate (taking place 80% of the time) for additional spending on the state pension in 2050 due to the triple lock, above and beyond earnings indexation, would be between £5 billion and £45 billion a year in today’s terms (taking into account the growing size of the pensioner population). This range is so large because of the uncertainty over the path of the state pension that the triple lock creates. This unpredictability makes it much more difficult for the government to plan future finances.
Further reading