State Pension: Can We Afford The Triple Lock?

Every politician currently in the running to lead this country has made the same promise: keep the triple lock. Labour, the Conservatives, Reform, and now Andy Burnham too. It’s the one thing they all agree on.

I’ve been digging into the numbers behind that promise this week, and into how other European countries manage to pay pensioners so much more than we do, a comment I often come across on social media. The honest answer is that the maths doesn’t add up without someone, somewhere, paying more for it.

Burnham’s commitment isn’t vague or wishy-washy. He’s said that tearing up the triple lock would be “a very damaging thing to do,” and he’s repeated that line twice now, once during the Makerfield by-election campaign and again in a speech setting out his wider agenda.

It’s a real, specific pledge, which is unusual for him, given that he can be rather good at giving vague, feel-good answers that don’t actually commit him to anything, according to Sarah Coles at AJ Bell.

Some of the economists Burnham is actually talking to behind the scenes, including Lord O’Neill of Gatley and former Bank of England chief economist Andy Haldane, reportedly think scrapping the triple lock is a no-brainer for fixing the public finances.

So you’ve got a leadership candidate publicly promising to protect something his own closest advisers think should go. This could indicate that the triple lock’s days may be numbered no matter what gets said on the campaign trail.

The triple lock guarantees the state pension goes up every year by whichever is highest out of three things: how much wages have grown, how much prices have gone up, or 2.5%.

Sounds fair enough on the surface.

The real problem is what happens after a big jump. Imagine your pension shoots up one year because inflation spiked. Great. But it never comes back down again, even once prices settle and wages catch up.

So every big jump just sits there permanently, baked into the bill, year after year. It’s a bit like a pay rise you got because petrol prices went mad for six months, except you keep getting paid that higher rate forever, even once petrol prices come back down.

That’s the bit that’s slowly bankrupting it.
The Office for Budget Responsibility, the government’s independent number-checkers, says this has already cost about £12 billion a year more than if the pension had simply gone up in line with wages since 2011. The Resolution Foundation, a think tank that’s normally pretty cautious and unflashy, has gone as far as calling it “a terrible policy, even for those wanting to increase the state pension faster than earnings.” That’s a strong thing for them to say out loud.

The leading alternative isn’t to cut the pension, it’s to change how it goes up each year. Experts at the IFS have suggested copying a system used in Australia. The idea: set a target for what the pension should be worth compared to average wages. In a normal year, it rises with wages, simple as that.

In a bad year, when prices shoot up faster than wages, it rises with prices instead, to protect pensioners from being squeezed. But crucially, once wages catch back up, the extra boost gets gently unwound over time, rather than locked in forever like it is now.

It’s not a cut. Pensioners would still end up considerably better off than they were before 2011. It would just stop the bill spiralling the way it currently is. The OBR reckons this one change alone would save around £9 billion a year by the end of the decade.

What’s interesting is that this isn’t a left versus right argument. The left-leaning Resolution Foundation wants it. So does Prosper UK, a think tank stuffed with former Conservative ministers, who reckon it would save £20.6 billion a year by 2050 and want that money spent on defence instead. When think tanks on opposite ends of the political spectrum agree on something, that’s usually a sign it’s going to happen eventually, whatever gets promised on the campaign trail this year.

So how is it that other European countries can afford to pay so much more? This is where I think most of the commentary online gets it wrong. The assumption is always that countries like Spain or Germany have found a cleverer, more generous way to run things. They haven’t.

They’ve found a more expensive way, and they’re paying for it directly out of people’s wage packets.
In Spain, pensioners can get a pension worth over 81% of their final salary, the highest in Europe which obviously sounds brilliant. But look at who’s funding it and the story becomes a lot less appealing.

Spanish workers hand over 4.7% of their salary, and their employers pay a hefty 23.6% on top, more than double what UK employers pay through National Insurance. If you’re self-employed in Spain, you’re covering the whole lot yourself.

Germany, France, and Belgium work in a similar way. They run big state pension systems funded by much higher payroll contributions than we have here, with smaller workplace pensions sitting alongside as more of a top-up. The UK does the opposite.

We keep National Insurance relatively low and rely much more heavily on workplace and personal pensions to make up the difference. It’s a genuinely different way of doing things, not a worse-run version of the same system.

That’s also why those eye-catching “Europe pays so much more” headlines can be a bit misleading. French, German, and Spanish state pension figures are based on what you earned during your working life, so the numbers you see quoted tend to reflect what a higher earner gets, not an average person.

Our flat-rate system, where almost everyone gets roughly the same amount regardless of what they earned, makes for a much less flattering comparison even when the real gap in generosity is smaller than it first looks. Just this week, Germany has decided to raise the state pension age to 70, a move that would be deeply unpopular were it to be replicated in the UK.

You can’t have pension generosity like Spain or Germany’s without also asking workers and employers to pay in much more than we currently do here.

Every politician currently promising to protect the triple lock is also, by implication, promising not to raise the contributions that would actually pay for that kind of system properly.

Something in that equation has to move eventually: either contributions go up, the pension age rises further, or the way the pension increases each year gets changed.

My honest view: changing how it rises each year, rather than touching the amount itself, is the least painful option on the table, and it’s the one with backing from both sides of the political divide. Whether any leader, Burnham included, actually has the nerve to do it before the public finances force the issue is a different question entirely.

This is a developing policy area, and the figures above reflect the latest available data. As ever, none of this is personal financial advice. If you’re approaching state pension age and want to understand exactly where you stand, it’s worth checking your National Insurance record on the gov.uk site.