State Pension Triple Lock Under Threat: Experts Propose Radical New Replacement System

The UK’s state pension system is at risk of becoming too expensive to maintain by 2035, according to experts. A think tank recently warned that the costs associated with providing pensions are growing too fast, and without changes, the system may no longer be affordable.

One of the main reasons for this is the way the state pension is funded. Unlike private pensions, where money is saved during a person’s working life and used later, the state pension is paid using taxes collected from people currently working.

This creates a strain on the working population, especially as the number of retirees continues to grow. By 2040, nearly 23 million people will be claiming benefits like the state pension, but only 34 million people will be working and paying the taxes to fund it. This imbalance is putting increasing pressure on the system.

Another issue is the “triple lock” policy, which guarantees that state pensions will increase each year by whichever is higher: inflation, the rise in average wages, or 2.5%. While this ensures pensions keep up with the cost of living, it also makes the system more expensive over time.

In 2021, the total financial obligation of the state pension was £8.9 trillion, and this figure is expected to grow even more. On average, someone born in 1956 is likely to receive £291,000 more in pension benefits than they contributed during their working life.

Currently, the state pension costs the UK government £125 billion a year and supports nearly 13 million retirees. Within the next decade, this cost could rise to £150 billion in real terms.

The Adam Smith Institute has predicted that 2035 could mark the breaking point when the government spends more on welfare payouts—most of which go to pensions—than it collects in taxes.

Experts believe there are possible ways to address the issue. One suggestion is to replace the triple lock with a system that ties pension payments to a fraction of average wages. Sir Steve Webb, a former pensions minister who helped design the triple lock, acknowledged that it cannot last forever.

He explained that over time, the triple lock could push pensions higher than both inflation and wages, which may not be sustainable. He also noted that, in the future, even pensioners might support redirecting government funds to other priorities, such as healthcare or education.

Another potential solution is to encourage more immigration. Immigrants, who are often younger and of working age, contribute to the economy by paying taxes and National Insurance while typically using fewer public services.

Research from the Centre for Economics and Business Research (CEBR) shows that immigration currently brings an additional £3.3 billion to the Treasury each year. Nina Skero, the CEO of CEBR, explained that immigrants play a crucial role in supporting the state pension system by contributing more in taxes than they take out in public services.

These challenges highlight the tough decisions ahead for the UK government. While the state pension has been a vital safety net for millions, maintaining it in its current form will require significant reforms to ensure it remains affordable for future generations.

Whether through policy changes like reforming the triple lock, encouraging immigration, or finding other sources of funding, it’s clear that action is needed soon to prevent the system from collapsing.