Triple Lock on Pensions Could Lead to Government Rising Retirement Age, Says Institute for Fiscal Studies

The triple lock could add up to £45 billion a year to the cost of state pensions, a report by the Institute for Fiscal Studies has found.

A member of staff at a branch of Halifax bank displays a new British £5 note, in London on Sept. 13, 2016. Alastair Grant, File/AP Photo

The government will face “insurmountable pressure” to increase the minimum retirement age by maintaining the triple lock on state pensions, according to the Institute for Fiscal Studies (IFS).

The analysis also indicates 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.

This projected range is big because of the uncertainty over the path of the state pension that the triple lock creates, making it difficult for either the government or future pensioners to plan their finances, the IFS said.

If the triple lock is kept in place indefinitely, the state pension could potentially be worth between £10,900 to £13,400 per year in today’s terms by 2050, the IFS estimated.

It added that this uncertainty makes it harder for people to plan for retirement.

The IFS report (pdf), published on Friday, also revealed that an additional £11 billion per year is spent on state pensions due to the triple lock, compared to what spending would have been if growth had been in line with either prices or earnings.

Uncertainty

Published ahead of next week’s release of official data for earnings growth, which will be used to set the annual increase in pensions, the report estimates spending on retirees could rise by a further £2 billion from April 2024.

Prime Minister Rishi Sunak is expected to support the increase after pledging last month to maintain the triple lock, which guarantees the state pension rises each April by whichever is highest of pay growth, inflation or 2.5 percent.

In analysis of the past 12 years, the IFS said that if the state had used only a single lock—linking annual pension rises to earnings or inflation—it would have spent £11 billion a year less.

Had the values of the basic state pension and the new state pension instead been determined by inflation or earnings growth since 2011, they would both now be around 11 percent lower, with a full new state pension worth around £180 per week and the basic state pension worth around £140 per week, the report said.

IFS also forecasts that the uncertainty ahead means the extra annual cost could be just £5 billion, or as much as £45 billion, depending on the path of earnings and inflation over the next two decades.

Prime Minister Rishi Sunak during a visit to Cofton Park, near Rednal, Birmingham, on July 24, 2023. Ben Birchall/PA Media

Protection

The IFS said the extra spending for the UK’s 12 million retirees would force ministers to look for savings elsewhere and possibly from increases in the state pension age for future generations.

The report, published on Friday, said: “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.”

Last month, IFS director Paul Johnson said pensioners had received two years of protection from the UK’s cost of living crisis, benefiting from the triple lock last year when prices were rising faster than incomes, and benefiting again this year now that earnings were rising faster than prices.

“That is what the triple lock is intended to achieve,” he said.

The IFS said that earnings growth figures released next Tuesday will be likely to determine next April’s increase in the state pension for the UK’s 12 million pensioners.

This is because it is typically used as the measure of earnings for the pensions triple lock – and because it is also likely to be above both 2.5 percent and CPI (Consumer Prices Index) inflation in September, it added.

The Institute for Fiscal Studies (IFS) says UK median income will fall while absolute poverty is forecast to rise. However, the government's newly announced Universal Credit scheme could reduce both absolute and relative poverty in the longer term. Alan Crowhurst/Getty Images

Pension Rise

The report said data covering April to June 2023 showed annual earnings growth of 8.2 percent.

It continued, “Unless this falls dramatically in the next data release, or unless CPI inflation (currently at 6.8 percent) makes a sharp surprise upward turn in September, state pensions will rise next April in line with the earnings growth figure announced on Tuesday.”

The report was released as part of the Pensions Review in partnership with the Financial Fairness Trust, which funds research to help improve living standards.

Responding to the IFS analysis, a Department for Work and Pensions spokesperson said: “The Government is committed to the triple lock.

“As is the usual process, the Secretary of State will conduct his statutory annual review of benefits and state pensions in the autumn, using the most recent prices and earnings indices available.”

PA Media contributed to this report.