Cost of the triple lock is set to surpass £20 billion

Last week, the Cridland review into the future direction of the retirement age published its interim findings. Increasing the age at which individuals are eligible for the State Pension is a crucial way of controlling future cost. But demographic considerations are not the principal cause of our spiralling pensions bill – the real culprit is 'uprating' policy.

Since 2011, the triple lock – which increases the value of benefits by the highest of inflation, wage growth or 2.5 per cent – has been used to uprate the State Pension.

The case for tying pensioners' incomes to earnings is solid. Those who are unable to work in later life should still share in the prosperity of working-age people. 

But the triple lock goes well beyond this. Whenever earnings growth falls beneath inflation or 2.5 per cent, the value of the State Pension increases as a percentage of wages. In recent years, this 'ratchet' has been a persistent feature of welfare policy. Next year, the basic State Pension will be uprated faster than earnings growth for the fifth time since 2012.

These small but persistent increases will see next year's basic State Pension worth £8/week more compared to previous plans. That additional expenditure comes with a significant price tag. The annual cost of the triple lock is now greater than the total social security bill for Northern Ireland, while the cumulative cost of the triple lock will surpass £20 billion in 2017-18.

Steep as they are, these figures pale in comparison to the consequences of maintaining current policy in the long run. Robert Chote, Chair of the Office for Budget Responsibility, suggests the triple lock undermines the future sustainability of the country's finances. He's right. Over the next 50 years, the triple lock alone will raise government debt by 26 per cent of GDP.

This expense cannot be justified. Pensioner poverty used to be a considerable problem, but this is no longer the case. Indeed, after housing costs, pensioners are now the least likely major demographic group to be in income poverty.

The Government, therefore, should scrap the triple lock and uprate the State Pension by a relative earnings link, which pegs benefits to a proportion of average wages in the medium term. This would secure the Government's core objective – to maintain the relative economic position of pensioners – as well as improve the country’s long-term fiscal outlook.

But those who seek reform should not hold their breathe. Theresa May has committed her administration to the triple lock until 2020. Politics is at stake here – pensioners vote en masse, and lean Conservative – but there is a more fundamental challenge to getting policy on the right track.

The cost of the triple lock mounts during periods of economic stagnation – events that are notoriously difficult to forecast with any degree of accuracy. That creates generates fiscal uncertainty – the OBR has changed its modelling of the triple lock three times since 2011 – but it also creates a problematic political dynamic. When the economy is growing, the triple lock is no more expensive than earnings indexation. Under such circumstances, the value of ditching this popular policy is limited. But when growth falters, and the cost of the triple lock mounts, curbing pensioner benefits is deemed to be heartless.

The sooner the Prime Minister takes action, however, the better, not least because a u-turn would create the fiscal space to undo the current freeze on working-age benefits. This unprecedented measure – implemented by the Coalition – will see the purchasing power of some of the country's most vulnerable families decline. Next year will see the cumulative real terms fall in the value of Jobseeker's Allowance since 2012 reach 4 per cent. The IFS estimates that 11.5 million families are expected to lose an average of £360 a year in real terms because of this package.

Uprating policy might be a niche area of welfare policy, but it's importance cannot be understated. The Prime Minister has committed to delivering a society that works for everyone. Rebalancing the welfare budget by overhauling the way benefits are increased each year would be a step towards delivering this goal.