The state pension is set to rise by more than previously expected after the Office for National Statistics (ONS) revised up its figures on wage growth for July, piling extra costs on public finances for Chancellor Rachel Reeves at this year’s Budget.
The ONS revised up its wage growth figure for July from 4.7 per cent to 4.8 per cent, with the measure used to calculate uprating as part of the triple lock pension, which ensures the state pension rises by whichever is highest out of wage growth or inflation.
Analysts in the City have said that retirees could now be on course to receive £241.30 per week rather than the previous £241.05 estimate.
Those on the full basic state pension will see their payments rise from £184.75 to £184.90.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, pointed out that given inflation was predicted to come under the figure while still being high, “the likelihood is that average wages will be the figure used and this should be confirmed in the forthcoming Budget”.
The higher than expected increase to the state pension could add costs to Reeves at next month’s Budget.
The Office for Budget Responsibility (OBR) said in March it expected wage growth to come to around 4.3 per cent in 2025 before falling back to between 2 and 2.5 per cent after 2026.
In its forecasts for pensioner spending, it said the government would have to budget around £158.6bn in the current financial year before the figure rose to as much as £166.3bn next year.
Pensioner spending is expected to soar to £181.8bn, per the OBR’s latest forecast.
Those figures could yet be revised in the upcoming fiscal report to be published alongside Reeves’ Budget, depending on the OBR’s own near-term predictions for earnings growth and inflation.
Forecasters at the fiscal watchdog said the main driver behind higher welfare spending was the triple lock mechanism and an ageing population.
State pension has become ‘unsustainable’
In a mid-year report on the fiscal risks facing the UK over the next 50 years, the OBR highlighted the triple lock as an “unsustainable” policy, having cost three times as much as first predicted when former Chancellor George Osborne introduced it in 2012.
Richard Hughes, chair of the fiscal watchdog, questioned whether the welfare state could be funded by taxpayers in the long run given the pressures to growth and the risks of new incoming financial shocks triggering a surge in inflation.
“The UK cannot afford the array of promises that it has made to the public,” Richard Hughes, the lead economist at the OBR, said.
“We produce these reports to draw attention to these issues, and our hope is that there is some attention paid to them.
“Precisely what the government does in response to these pressures and the choices that ultimately every country is going to have to make about how they afford their welfare states and their wider public services commitments are issues for politicians.”
The IMF and several City economists at St James’ Place and Deutsche Bank have said that ditching the triple lock would put public finances on more stable footing.
None of the political parties have pledged to scrap the triple lock pension.
The Tories defended the policy in clear terms last week, with opposition leader Kemi Badenoch claiming it was “Conservative policy” when she was asked about its sustainability during a welfare event in the summer.
The Labour Party manifesto also pledged to keep the triple lock pension despite previous comments from Treasury ministers including Torsten Bell, who previously headed the Resolution Foundation, against the uprating mechanism.
Reform UK’s Zia Yusuf, however, said the party would keep the policy under review at a party conference in Birmingham, with a further announcement yet to be made.