Rachel Reeves’s tight fiscal rules may force a review into the state pension system to make further savings, an investment expert has suggested. The Office of Budget Responsibility (OBR) predicts pensioner spending will surge to £182billion by the 2029/30 tax year, driven by the ageing population and triple lock guarantee, which could make it an area Labour could target in future to cut costs.
Rachel Vahey, head of public policy at AJ Bell, said: “The Chancellor’s Spring Statement brought home the precarious tightrope the Government is walking to meet its fiscal rules. With little to no wriggle room built into current plans, the Government may still be forced to look elsewhere for further savings. One area that could come under scrutiny is the state pension.”
Ms Vahey noted this is because the “biggest proportion” of the welfare spending is on pensioners, adding: “By the end of the decade, it’s estimated pensioner spending will be almost 50% of the total welfare bill.”
She said: “If the Government is looking to cut costs, then pensioner spending could be something that moves into the Treasury’s crosshairs in the next few years.”
State pension rates are set to rise by 4.1% in April, raising the full ‘basic’ state pension to £176.45 per week (£9,175.40 per year) and the full new state pension to £230.25 per week (£11,976 per year).
Ms Vahey warned: “It will be perilously close to the personal allowance of £12,570 and should overtake it in a couple of years if things continue, thanks to frozen tax thresholds. At that point, the Government will have a huge decision to make.”
The Labour Party pledged to protect the triple-lock guarantee in its manifesto, ensuring state pension increases match earnings or inflation if above 2.5%. So, targeting the benefit rate to support cost-cutting measures would not be so straightforward.
Instead, the investment expert warned that it could consider tweaking the state pension age timeline. Currently, the state pension age for men and women is set to increase to 67 between 2026 and 2028.
The OBR forecast showed the significant fiscal impact that this increase could have on the nation’s finances. The rise from age 66 to 67 between 2026 and 2028 is set to slash borrowing by over £10billion, as 820,000 fewer 66-year-olds will receive their state pension.
The state pension age is then due to increase again to 68 between 2044 and 2046.
Ms Vahey said: “The temptation could well be to see if as much bang for the buck can be delivered for future generations by bringing forward the planned increase to age 68.”
However, she noted: “Any changes to the state pension will be hotly contested. But the crunch time is fast approaching when the Government will finally be forced to address the question of how much the state pension should really offer, at what age, and how it can increase payments sustainably each year.”
Edmund Greaves, money expert from financial information platform Mouthy Money, added the state pension is “unsustainable in its current guise”. He said: “The state pension is paid for by taxpayers. As our population ages, we have fewer taxpayers paying for more pensioners.
“The Government doesn’t want to means-test and keeps on refuting or ignoring the problem. Its only option instead will be to keep increasing the age future generations can get state pension. It’s already set to rise to 70 for younger workers and isn’t going to go the other way.”
Express.co.uk has contacted the Treasury for comment.
Arabic
Chinese (Simplified)
Dutch
English
French
German
Italian
Portuguese
Russian
Spanish