Triple lock impact on growing state pension cost of £9tn sparks fears over its future

The triple lock should be scrapped and a replacement found as the state pension bill to taxpayers is set to balloon from £8.9trillion, a think tank has said. The Adam Smith Institute (ASI) said the state pension could go bust as soon as 2035, as it calculates the state will spend more on welfare than it receives in National Insurance receipts by that time.

Analysts at the think tank said the "increasing unaffordability" of the state pension is largely due to the "ratcheting effect" of the triple lock.

The ASI said the state pension has been hiked to "increasingly unaffordable" levels, pointing to this year's announcement it will be uprated by 8.5 percent in 2024/5, following 10.1 percent last year.

Maxwell Marlow, author of the ASI report and Director of Research at the think tank, said: "It should alarm us all that the state pension could become fiscally unsustainable within the next 10 years.

"Working-aged people are already taxed to the hilt in order to universally subsidise pensioners, and this inherent unfairness within Britain’s economy will only become more entrenched as our demographic deficit worsens."

The state pension had a total obligation to Brits - meaning the overall amount to be paid out to everyone in the UK over their lifetimes - of £8.9tn in 2021, according to Office for National Statistics figures cited by the ASI.

Introduced in 2011, the triple lock sees basic and new state pensions increase annually by whichever is greater out of price inflation, the change in average earnings or 2.5 percent.

Mr Marlow urged the next Government to review the state pension as a matter of urgency, either through means testing so those with a net worth of more than £1million are ineligible, or by moving to a double lock system to avoid the "destructive ratcheting" seen today.

Under a double lock, the state pension would rise by 2.5 percent or annual wage growth only. The third "lock", inflation, would be removed.

Another option recommended by the ASI is to move towards a Swedish model, which combines basic benefits, mandatory pension contributions made during employment and individual accounts.

It also contains an automatic balancing mechanism based on economic performance and demographic changes, which ASI argues makes it much less likely to become insolvent in the long term.

The ASI said investment of the model's contributions on a defined contribution basis would result in a higher pension for claimants.

According to the ASI, the state pension as it is already makes up the greatest proportion of welfare spending and is forecast to account for 42 percent of the total spend in 2023-24.

The cost is expected to balloon to more £150billion a year in real terms, according to figures published by the Telegraph cited by the think tank.

It defines the state pension's fiscal unsustainability as the point at which the state will be spending more on welfare payouts, with the state pension accounting for most of that total, than it will be receiving into the National Insurance Investment Fund Account.

The ASI acknowledges in its report that the state pension is not funded exclusively by National Insurance payments.

For the purposes of its analysis, the report authors assumed the National Insurance Investment Fund Account is only being used to pay for the state pension, rather than other welfare payments or public services.

The report argues many of today's pensioners are being paid far more than they contributed, adding that the average person born in 1956 will receive £291,000 more than they put in.

In adopting its method, ASI said it was seeking to show how Britain's state pension obligations are set to become unsustainable.

It also highlighted the "burden" that the universal benefit places on workers, who the think tank said are suffering under the UK's heavy tax burden to pay for today’s pensioners.

The report noted that this is set to get worse thanks to a demographic deficit, with 22.7 million claimants but only 34 million working aged people in work to fund it by 2040.