Are Pensions Becoming Too Expensive to Protect? -

Next April, the full new State Pension is expected to rise from £241.30 to £250.70 a week. For someone receiving the full amount, that is an increase of around £489 over a year. The rise is likely to be determined by average earnings growth of 3.9%, under the triple lock, which guarantees that the State Pension rises each year by whichever is highest of inflation, average earnings growth or 2.5%.

For an individual pensioner, £489 is a relatively straightforward increase in income. For the government, that increase has to be paid across millions of people, and each annual increase becomes part of the base for future increases.

The State Pension already costs the government £154bn a year. Is protecting their incomes in this way becoming increasingly difficult for the public finances to absorb?

A £489 rise is small. Millions of them are not.

The triple lock was introduced in 2011 to prevent the State Pension from falling behind either prices or wages. Since then, it has produced several unusually large increases. The pension rose by 10.1% in April 2023, following the surge in inflation, and by 8.5% in April 2024, following strong earnings growth. Those increases did not disappear when inflation and wage growth subsequently slowed. They became the starting point for every future increase.

That is what makes the triple lock different from simply protecting pensioners from inflation each year. A particularly high year can permanently increase the level of the pension, while a quieter year cannot reverse the increase. The effect is a ratchet. State pension spending is expected to reach £154 billion in 2026–27, equivalent to 4.9% of national income, and the IFS estimates that spending is now £47 billion higher in real terms than in 2010. The triple lock is not responsible for all of that increase, but around £16 billion a year is estimated to come from the difference between the triple lock and what earnings-linked uprating would have delivered.

The short-term cost of continuing the policy is not necessarily dramatic. The Office for Budget Responsibility’s March forecasts suggested that the triple lock would add around £600m a year to State Pension spending by 2029–30 compared with continuing to increase pensions in line with earnings. But that figure is only meaningful within that forecast. The IFS estimates that if the triple lock were maintained until 2050, its additional annual cost would be around £20 billion in today’s terms, with a plausible range of £5bn to £40bn. The reason for the enormous range is that nobody knows how inflation and earnings will move relative to each other over the next 25 years.

Protecting pensioners does not make the risk disappear

This is the central problem with the triple lock. Pensioners are protected from some of the uncertainty created when prices and wages move unexpectedly, but the uncertainty itself has not disappeared. It has moved into the public finances.

If inflation rises sharply above earnings, the triple lock can increase pension payments more than an earnings-based system would. If earnings grow unusually quickly, the same thing can happen. The government therefore cannot know today what the cost of the policy will be in ten, twenty or thirty years. The IFS’s £5bn to £40bn range for 2050 illustrates just how much depends on the path the economy takes. More volatile inflation and earnings growth would tend to push the eventual cost towards the upper end of that range.

The experience of 2022 shows why this matters. Average earnings growth had been distorted by the return of workers from furlough, producing an 8.3% figure that would have generated an unusually large pension increase. The government temporarily changed the rules so that the State Pension rose by 3.1%, in line with inflation, rather than following the earnings measure. It was the only time the triple lock had been altered since its introduction. The episode showed that exceptional economic conditions can create a choice between following the formula and limiting an increase that policymakers consider anomalous.

That uncertainty is becoming more important because the increases compound. The government is not deciding each year how much pensioners should receive from scratch. It is deciding how much to increase an already higher level of spending. The IFS estimates that the full new State Pension would be around 12% lower today if it had instead risen in line with average earnings since 2010. Pensioner incomes have also improved for other reasons, including higher employment and private pension income, but the triple lock has played a significant role.

The cost is showing up elsewhere

The interaction between the State Pension and the tax system provides a useful example of what happens when one guarantee changes faster than another part of the system.

The standard Personal Allowance is £12,570 and is being kept at that level until April 2031. The full new State Pension is currently worth £12,548 a year, leaving only £22 between the two. If the expected 3.9% increase takes the pension to around £13,036 next April, the full State Pension will move above the tax-free allowance.

State Pension income is normally taxable, but the government has said that people whose only income is the basic or new State Pension will not have to pay small amounts of tax through Simple Assessment from April 2027. LCP estimates that without this concession, someone solely dependent on the new State Pension would face a tax bill of around £88 in 2027–28, rising to £153 in 2028–29 and £220 in 2029–30. But its analysis also suggests that fewer than one in sixteen pensioners would benefit from the concession.

This creates a particularly awkward interaction. Someone who qualifies for the exemption could avoid a small tax bill, while another pensioner with only £1 of additional income could lose the concession and become liable for tax on the State Pension as well. LCP describes this as a “cliff edge”, illustrating how a decision to protect one group from the consequences of a rising pension can create new complications elsewhere in the tax system. The wider point is that the cost of protecting pension incomes does not necessarily appear in the State Pension budget alone. It can also affect tax receipts and the design of other policies.

The same issue becomes larger when viewed across the whole welfare system. Great Britain is forecast to spend £322.6bn on social security in 2025–26, with around 55% going to pensioners. That includes £177.7bn of benefits for pensioners, of which £146.1bn is State Pension spending. The government therefore has to make choices about a large and growing part of public spending, while the number of working-age people supporting each pensioner is expected to fall over the coming decades.

What does that mean for the future?

The evidence does not show that the triple lock is about to become unaffordable. In the government’s current spending forecasts, its additional cost over the next few years is relatively small compared with total State Pension spending. The bigger problem is that the long-term cost is difficult to predict, because the rule deliberately exposes the public finances to whichever of inflation, earnings or 2.5% happens to be highest.

The UK has spent years trying to increase the value of the State Pension after decades in which it fell behind average earnings. Pensioner relative income poverty is now around 14%, compared with 20% for the population as a whole, while median pensioner incomes have moved much closer to those of non-pensioners. There are therefore clear reasons why governments have been reluctant to remove the protection the triple lock provides.

But keeping the guarantee indefinitely means accepting an uncertain future bill. The alternative does not have to be simply abandoning protection altogether. The IFS has pointed to Australia’s approach as one possible model, where pensions broadly follow earnings over the long term while receiving temporary protection when prices rise faster than wages. Other proposals involve smoothing the effects of unusually volatile inflation rather than allowing each spike to permanently increase the pension base.

The choice is ultimately about how much certainty the government wants to give pensioners, and how much uncertainty it is willing to leave in the wider public finances. The triple lock makes the first more predictable by making the second less so.

As the Budget approaches on 28 October, is this is a sustainable way to divide economic risk between pensioners, taxpayers and future governments?

💼 Unpacked

Triple lock – A guarantee that the State Pension rises each year by whichever is highest of inflation, average earnings growth or 2.5%.

Personal Allowance – The amount of income an individual can receive before paying Income Tax. It is currently £12,570 and is being held at that level until April 2031.

Fiscal drag – What happens when tax thresholds remain fixed while incomes rise, causing more income to become taxable without tax rates increasing.

Ratchet effect – A situation where an increase becomes part of a new, higher baseline and is not subsequently reversed when the factor that caused it falls back.

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