Jeremy Hunt suggests the state pension triple lock is unsustainable. Is it?
Jeremy Hunt has suggested the state pension triple lock may be on the way out.
The chancellor made the comments yesterday in front of the House of Lords Economic Affairs Committee.
He said the state pension triple lock have to come “under review” in the coming years as an ageing population puts ever greater strain on the public finances.
Under current government policy, the state pension rises each April in line with whichever is highest of inflation, average wage increases or 2.5 per cent. It came into force in the 2012 financial year and has been applied every year since, with the exception of 2022/23.
This year, it will rise 8.5 per cent, in line with average earnings following a 10.1 per cent increase last year, to match inflation. In total, the Department of Work and Pensions (DWP) think that expenditure on the State Pension will cost £124.3bn this year.
However, economists are concerned an ageing population and a greater likelihood of higher inflation will put ever greater strain on the public finances in the years to come.
A number of economists have also pointed out that the triple lock ratchets spending higher by committing to increases even after economic shocks have dissipated.
Forecasts from the Office for Budget Responsibility (OBR) have suggested spending on pensions will be £23bn higher in 2027-28 than at the start of the decade.
Looking to 2050, when there are expected to be around 25 per cent more pensioners, spending on pensioners – including the pension credit and winter fuel payments – will be £32bn higher.
But the cost of the state pension triple lock is also deeply uncertain. Its long term cost depends on inflation forecasts, which can dramatically alter how expensive the policy is compared to increasing the pension in line with average earnings.
According to the Institute of Fiscal Studies, by 2050 the triple lock could “easily” cost anywhere between an extra £5bn or £40bn per year compared to just increasing in line with earnings.
Given this, there is a growing feeling that the triple lock will have to be reformed.
The IFS thinks it should be scrapped. William Hague, the former Tory leader, has described it as a “runaway train” while Mel Stride, the pensions secretary, admitted there were “very, very long term” questions over its sustainability.
The Organisation for Economic Cooperation and Development suggest the UK could save billions by replacing the triple lock with an average of inflation and wage growth.
However, while Hunt said the policy would have to be kept “under review”, he still seemed confident the policy could be maintained.
When asked by members of the Lords’ Economic Affairs Committee whether the policy was sustainable, he said it depended on improving productivity and growth.
“The answer is very contingent on how successful we are. If we are able to run public services more efficiently, if we are able to increase our long-term growth rate, then it is entirely possible we can continue to have the levels of public provision we currently have, and the support for pensioners, and I very much hope that is the case,” he said.
“We are confident we can continue to support pensioners in the way we have been in the past”.