State pension triple lock could cost £9bn in 2024 - £2bn more than forecast

New interactive investor calculations, based on Office for Budget Responsibility (OBR) forecasts, Department for Work and Pensions (DWP) state pension data, ONS wages data and Bank of England inflation forecasts, show that the cost of the state pension triple lock could hit £9 billion in 2024-25.

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The total state pension bill could be £2 billion higher than the current DWP forecast next year, due to higher-than-expected wage and CPI inflation compared to predicted inflation at the time of the DWP forecast in March 2023.

Assumptions: calculations based on DWP outturn and forecast tables, OBR March inflation forecast for Q3, August Bank of England inflation forecast for Q3.

How we worked out calculations

Row 1 and 2: based on DWP outturn and forecast tables. Estimated cost of triple lock based on March OBR inflation forecast for Q3 2023 (5.4%)

Row 3: state pension and cost of triple lock based on Bank of England inflation forecast Q3 and latest ONS average wages data ( both 6.9%).

Alice Guy, Head of Pensions and Savings, interactive investor says: “With more of us living for longer, the triple lock is fast becoming an costly financial commitment for the government. Both inflation and average wage rises are higher than expected back in March when the DWP set their budgets, which could push the state pension higher than expected in March. The latest ONS wages data shows that average wages rose 6.9% between Mar and May 2023, while inflation also remains stubbornly high, expected to average 6.9% in Q3 based on the latest Bank of England forecast. This compares with a lower level of inflation expected when the DWP set its budget in March, 5.4% on average for Q3 2023. And this has a knock-on impact on the state pension, which is guaranteed to rise by the higher of inflation in September, average wages over the summer and 2.5%.

“The DWP March forecast expected the total state pension cost to rise to £135 billion in the tax year beginning April 2024. But sticky inflation and increasing wages mean that the state pension bill could rise to around £137 billion next year, the triple lock estimated to cost around £9 billion to the taxpayer based on ii calculations.

“The state pension final bill could be lower if inflation or wages fall over the summer. There are signs that the labour market is loosening, with vacancies falling in recent months. This could mean inflation and wages fall slightly over the summer, resulting in a slightly lower state pension bill.”

Stark choice for the government

Guy adds, “It’s a huge headache for the government as an ageing population means that the state pension is soaring, becoming an ever bigger proportion of total government spending. In the long run, the government could face a stark choice between reducing the value of the triple lock or raising the state pension age more quickly than planned.

“There are no easy solutions as even with the triple lock, the cost-of-living crisis means that an increasing number of pensioners are living in poverty. There’s a big time lag between high inflation and an increase in the state pension, meaning that many poorer pensioners are facing a shortfall and are struggling to make ends meet.

“If you are struggling on a low income in retirement, then it’s important to see if you could be entitled to benefits to supplement your income. It’s estimated that 800,000 pensioners are entitled to Pension Credit [and] aren’t current claiming it, a benefit that is worth an estimated £3,500 on average.”