Triple lock inflation boost of 7% heaps pressure on state pension age

24% expected to be above state pension age by 2072.

With inflation remaining stubbornly high, the state pension and the triple lock will cost even more than previously expected, expected to rise by 7% next year in line with the Bank of England’s forecast for inflation in September.

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The Independent Review of the State Pension Age, published on 30 March 2023 and prepared by Baroness Neville-Rolfe, reveals a stark choice for future governments which will need to choose between raising the state pension age as high as 74 for current 30-year-olds, reducing the triple lock, or seeing Britain’s state pension payments rise to unsustainable levels. High inflation puts even more pressure on the benefits budget as the state pension is one of the government’s most expensive bills.

March 2023 OBR forecast.

Source: independent review of the state pension age 2022.

Factors pushing up state pension age:

• Life expectancies are expected to improve 1.2% on average over time
• Life expectancies fell during the Covid pandemic but are expected to return to their normal upwards trend in the future
• 24% of the population is expected to be above state pension age by 2072

The state pension age is currently 66 but is due to increase to 67 in 2028 and 68 between 2044 to 2046. An independent review of the state pension age earlier this year recommended that the state pension is tied to GDP in the future and is capped at 6% of GDP. This would mean the state pension age rises more quickly than planned, assuming the triple lock is retained in its current form.

Alice Guy, Head of Pensions and Savings interactive investor says: “Stubbornly high inflation and the soaring cost of the state pension will heap even more pressure on government budgets as the state pension looks set to rise in line with inflation, currently forecast to be 7% by the Bank of England.

“Critics of the triple lock argue that it risks generational inequality as older people see their benefits protected from inflation, while working-age people have to wait ever longer to receive the state pension.

“Proposals in the Independent Review of the State Pension age to cap state pension spending at 6% of GDP could lead to an acceleration of the state pension age timetable so that current 48-year-olds would have to wait until 68 before receiving their state pension and 30-year-olds might not get their state pension until they reach 74-years old.”

The report recommends that, “the government sets a limit on state-pension-related expenditure of up to 6% of GDP (this could be met through changes to SPa, eligibility rules or uprating”. The report also notes that, “while we make no firm recommendation, current projections of GDP and state-pension-related benefit expenditure suggest that SPa should rise to age 69 over the period 2046-48. This possible rise should be reassessed in the light of new fiscal and life expectancy projections. We note that the government has other tools to control state-pension-related expenditure as a share of GDP beyond raising the SPa, including the generosity of pension uprating.” (p121)

The report also includes a possible timetable for state pension age changes if the proposals to cap state pension spending at 6% of GDP are adopted with no change to the triple lock, p117.

Possible state pension changes based on capping state pension at 6% GDP with no changes to triple lock

Alice Guy says: “At the heart of Baroness Neville-Rolfe’s independent report into the state pension age lies a knotty conundrum. With an ageing population there will be fewer workers to pay for each pensioner in the future and something has to give to keep the state pension affordable for tomorrow’s taxpayers.

“Baroness Neville-Rolfe’s proposals include capping the state pension at 6% of GDP in the future. To stick to this strict budget, the government would face an unenviable choice as the population ages, choosing between raising the state pension age as high as 74 for current 30-year-olds or cutting back on the triple lock commitment.

“If the proposals to cap state pension spending are adopted, the report reveals that someone currently aged 30 or younger could be waiting until aged 74 to receive their state pension. This would mean they miss out on eight years of state pension compared to current pensioners, worth £209,432 by 2067.

“Although these proposals seem shocking, these regular state pension age reviews are needed to make sure the government is realistic about their future commitments, so the state pension remains affordable. The proposal to cap state pension spending at 6% is not set in stone and future state pension choices will depend on life expectancies, economic growth and inflation in the years to come.

“It’s important to remember that state pension age changes also impact on the private pension age. From 2028, the government plans to link the minimum private pension to the state pension age, setting it at 10 years before the state pension age. These proposals could mean that someone currently aged 30 has to wait until they reach 64 before being able to access their private pension pot, 10 years before their state pension age. Younger workers who want to retire early may need to supplement their private pension with other savings vehicles such as ISAs, which have no age limit.”