Can the UK afford the triple lock on state pensions?

The value of state pensions in the UK is protected by the so-called triple lock. This policy has led to substantial increases in payments to pensioners, raising questions about its affordability over the longer term.

In the run-up to the 2024 general election, both the Conservative and Labour parties have confirmed their intention to maintain the ‘triple lock’ for state pensions. In this article, we explain what the policy is and why it could be politically contentious.

It is worth noting that since the start of the election campaign, the Conservatives have promised an additional ‘triple lock plus’, with an increase in the income tax personal allowance for pensioners. The details of this policy proposal – and analysis of how it might work in reality by the Institute for Fiscal Studies (IFS) – are in the Economic Observatory’s first election economics newsletter.

To summarise, Jonathan Cribb, Carl Emmerson and Paul Johnson at the IFS see this as a ‘yo-yoing’ of tax policies, when some consistency in the taxes that people pay would be more desirable.

What is the triple lock and why was it introduced?

The triple lock is a mechanism that automatically increases the state pension from April each year by the maximum of three measures: the rate of inflation (measured by the consumer price index, CPI); average wage growth (the average weekly earnings index); or 2.5%.

The logic behind using the highest of these three measures is that the state pension is increased in line with inflation to protect the real incomes of pensioners. But if wage growth is higher than this, the intention is that pensioners share in the increased economic prosperity. Lastly, if both inflation and wage growth are below 2.5% (representing only weak economic growth/stagnation), pensioners’ real incomes still rise over time.

The argument for protecting pensioners' incomes relative to people of working age is that the former are less able to change whether they work or the amount of time that they work (what economists call labour supply decisions) in the face of economic shocks, such as the recent cost of living crisis.

The triple lock was originally introduced by the coalition government in April 2011. It was one of a raft of pension policies brought in to implement the three main recommendations of the Pensions Commission report of 2006.

First, there was the phased introduction of auto-enrolment, which was implemented from 2012. This required employers to enrol their employees automatically into a workplace pension with compulsory employer contributions.

Second, there was a recognition that the state pension age would need to rise at periodic intervals in the future (the 2014 Pensions Act requires such periodic reviews). An earlier Economics Observatory article addresses rising state pension ages in countries with ageing populations.

Third, it was agreed that the state pension system should be reformed ‘to deliver a more generous, more universal, less means-tested and simpler state pension’ (Pensions Commission final report). The triple lock, along with the more generous new state pension from 2016, represents the implementation of this third proposal.

How have state pensions changed over time?

Before 2010, UK state pensions had only increased at the rate of inflation from 1979. The cumulative effect of this policy was that, by 2010, the value of the state pension had fallen from 26% to 16% as a percentage of average earnings (Hobson et al, 2023). This fall illustrates that with price indexation alone, pensioners failed to share in the benefits of economic growth.

Figure 1: Inflation, earnings growth and triple lock, 2011-24

Source: Hobson et al, 2023

Figure 1 shows the effect of the triple lock (the blue line) being the maximum of inflation, earnings growth or 2.5% on the upgrade to state pensions since 2011/12. Note that in 2022/23, the triple lock was amended for one year to allow for the increase in pensions to be adjusted by the CPI inflation rate, even though this was lower than earnings growth. This was due to the peculiarities in the labour market caused by the Covid-19 pandemic, when wage growth was bouncing back from lockdown restrictions.

One study estimates that the cumulative effect of the triple lock over the 14 years since it was introduced, is that the state pension is £800 a year higher than if pensions had been uprated by either wage growth or inflation alone (Kirk-Wade, 2023).

In April of this year, the state pension went up by 8.5%, which means that it is now worth £221.20 a week (£11,502 per annum) for the full, new flat-rate state pension, paid to those who reached state pension age after April 2016 (BBC News).

The OECD reports that most developed countries index their pension payments by some combination of inflation and/or wage growth – although the UK’s basic state pension remains low by international standards (OECD, 2022).

What are the implications of the triple lock?

The triple lock is expensive. For the spring budget of March 2024, the Department for Work and Pensions (DWP) forecast that expenditure on state pensions will be £124 billion in 2023/24, rising to £158 billion in 2028/29.

One report estimates that the triple lock costs around £10 billion of total pension costs (Hobson et al, 2023). This means that the pensions bill would be £10 billion cheaper if pensions were indexed to either prices or wages alone.

There is a recognition that the triple lock cannot last indefinitely, and in the long term, it will be withdrawn. But in reality, it will be very difficult for a politician to abolish this popular policy.

According to DWP benefit statistics for August 2023, there were 12.6 million people receiving the state pension in February 2023. That is 12.6 million voters out of a total electorate of 46.5 million registrations for the upcoming election.

It is not difficult to see that in our democracy, pensioners represent a sizable proportion of the electorate – and these older voters are going to be influenced by projections for their incomes.

In our 'pay-as you-go' state pension system, the working population pays for the pensions of the retired on the understanding that, in turn, a future working population will pay their pensions – this is an implicit intergenerational contract.

But it would be more honest for politicians to be explicit with the electorate that continuing with the triple lock needs to be paid for with higher taxes.