State pension warning raises triple lock abolition prospects

The state pension triple lock could be set for abolition as the rule makes paying pensioners increasingly unaffordable for the Government.

The state pension could face watering down after an Office for Budget Responsibility (OBR) report found the so-called ‘triple lock’ had cost three times more than forecast.

The OBR produces annual reports looking at Government spending and forecasted spending, plus debt and other issues in the economy that can affect the state’s finances.

In this year’s report it found that since the introduction of the state pension triple lock in 2012, the cost of annual increases had been triple what was initially forecast.

The original forecast projected annual increases would be around £5 billion by the tax year 2029/30. Instead, those annual increases are now expected to reach £15 billion thanks to the triple lock policy.

The state pension triple lock policy guarantees that the state pension will be increased each year by the equivalent of inflation, average wage growth or 2.5% – whichever is higher.

It in effect means the state pension will always at least match or beat inflation, making it a highly costly policy for the Government to keep. 

State pension reform

The state pension is not paid from a central fund or savings pot, despite workers contributing National Insurance every year over their working lives. It is paid for out of general taxation each year.

The state pension is one of the Government’s single most expensive policies, currently costing around £150 billion a year and set to rise closer to £200 billion by 2030. For context, the Government currently spends around £1.3 trillion every year in total.

The triple lock, by design, is making the state pension more expensive every year for the Government to afford to pay out. This has led to calls to reform the policy before it becomes totally unaffordable.

State pension affordability has been tackled in the past, with the equalisation of state pension ages for men and women and increases to the state pension age.

The income is under pressure from other areas now too. With the income tax personal allowance frozen at £12,570, retirees could soon see their state pension payments effectively taxed as the annual state pension rises above this level.

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