Triple lock sending cost of state pension soaring
Retaining the triple lock on state pensions is costing an extra £11 billion a year and could add as much as £45bn to the annual welfare bill by 2050, according to the Institute for Fiscal Studies.
Ahead of official data for earnings growth, which will be used to set the annual increase in pensions, the IFS has raised new questions around the triple lock which guarantees the state pension rises each April by whichever is highest of wage growth, inflation or 2.5%.
It was introduced by the Coalition government in 2010 and was designed to ensure people’s pensions were not impacted by gradual rises in the cost of living over time.
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 £11bn less.
The extra cost created by the lock could be anything between £5bn and £45bn, depending on the path of earnings and inflation over the next two decades, it 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 triple lock has only been frozen once due to the impact of COVID on wages, which would have led to an 8% hike in state pension payments in April 2022.
Last April, payments rose by over 10% due to record levels of inflation when the decision was taken the previous autumn.
The Conservatives and Labour are committed to retaining the triple lock by the lock despite the rising cost.
“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,” said the IFS.
Next week the Office for National Statistics will release its estimate for average annual earnings growth over the three months from May to July, which is used to calculate the triple lock.
In June, earnings growth reached 8.2%. By contrast, inflation fell to 6.8% in July, meaning pensions will be pegged to earnings this time.