Continuing the state’s triple pension lock could add up to £45billion to the social bill by 2050, putting ‘insurmountable pressure’ on the government to raise the minimum retirement age retirement, according to the Institute for Fiscal Studies.
In a report ahead of the release next week of official earnings growth data, which will be used to set the annual pension increase, the IFS estimates spending on pensioners could rise by a further £2bn. from April 2024.
Rishi Sunak is expected to support the increase after pledging last month to maintain the triple lock, which ensures that the state pension increases each April according to the higher value between wage growth, inflation or 2.5%.
In its analysis of the past 12 years, the IFS said that if the state had used just one lock, linking annual pension increases to income or inflation, it would have spent £11billion sterling less.
He also predicts that the uncertainty ahead means the additional cost could be as little as £5bn, or even as high as £45bn, depending on how earnings and inflation play out. over the next two decades.
Labor has signaled they will back the pension increase and come to the next election with a plan to keep the guarantee for another five years.
The IFS said extra spending for the UK’s 12 million pensioners would force ministers to look for savings elsewhere, and possibly by raising the retirement age for future generations.
“Keeping the triple lockdown in place for too long increases state pension spending so significantly that it leads to insurmountable pressure for a much higher retirement age,” the report said. “This would particularly affect people in poorer health who struggle to keep their jobs until they reach the legal retirement age.”
Last month Paul Johnson, director of the IFS, said pensioners had been given two years of protection against the UK’s cost of living crisis, benefiting from the triple lockdown last year when prices rose faster than incomes, and benefiting again this year now that incomes were growing faster than prices.
“That’s the goal of the triple lockdown,” he said.
Next week the Office for National Statistics will publish its estimate of average annual profit growth over the three months from May to July, which is used to calculate the triple lock.
In June, earnings growth reached 8.2%. On the other hand, inflation fell to 6.8% in July, which means that pensions this time will be linked to earnings.
State pensions account for around £124billion of public spending, according to the Office for Budget Responsibility. An 8.2% rise from next April would bring the cost to just over £134bn.
Heidi Karjalainen, one of the authors of the report, said the triple lockdown had pushed the value of the state pension to 25% of the average wage since it was introduced in 2011, adding £11billion to the bill.
She said: “The triple lockdown makes it particularly difficult to know how much you might receive from a state pension and how much the state pension will cost the state in the future.
“An additional real risk is that keeping the triple lockdown in place for too long increases state pension spending so significantly that it leads to insurmountable pressure for a much higher retirement age. This would particularly affect people in poor health who struggle to keep their jobs until they reach the legal retirement age.”
A spokesman for the Department for Work and Pensions said: “The government is committed to the triple lockdown. As is customary, the Secretary of State will conduct his statutory annual review of state benefits and pensions in the fall, using the most recent price and income indices available.”