All three main parties backed the so-called ‘triple lock’ on the state pension heading into the general election earlier this year. The Conservative government is now honouring the pledge.
The policy, which guarantees payouts rise according to whichever is higher: inflation, wages or the figure of 2.5 per cent, ran throughout the last parliament. It has meant pensioners’ annual income has increased by at least 2.5 per cent at a time when price rises have been well below this level.
It has also come at a time when wider benefits were being frozen and in some cases cut. But as more cuts to welfare loom, questions are again being asked about the affordability of the promise.
According to a report that appeared on the government website last week – which it says was “published in error” – the triple lock might not be sustainable, the Financial Times reports. Published by the Government Actuary’s Department, which provides advice on pension costs for public sector bodies, the report estimates that the triple lock is “already costing around £6bn a year, with £70bn in total spent on the state pension in 2015/16”.
Compared to a simple earnings uprating, it will add at least an additional nine per cent to the benefit bill by 2040 in a base scenario, rising to 11 per cent “under a ‘new normal’ scenario of low inflation, low earnings growth”. This could even surge to as much as 73 per cent if a Japanese-style deflationary environment takes hold, Citywire adds.
The report does not consider the potential effects of measures such as increasing the state pension age, which are designed to lessen the pensions burden.
Based on Office for National Statistics figures for 2013/14, the cost of the state pension has fallen by more than £10bn in the past two years. But the statistics also reveal total pensioner benefits take up more than 50 per cent of the welfare budget, emphasising why cuts that are made in a bid to balance out government spending need to be so concentrated elsewhere.
“On the basis of this report and the cost projections in it there has to be a question mark as to whether the triple lock is affordable over the longer term,” said Malcolm McLean, senior consultant with Barnett Waddingham.
A spokesman said the government remains “determined to ensure economic security for working people at every stage of their life, which is why we have protected the incomes of millions of pensioners with the triple lock”.