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The year the state pension will start to collapse – whoever wins the election

Sir Keir Starmer on the campaign trail in Scotland. The Labour leader is committed to the triple lock and not raising retirement age
Sir Keir Starmer on the campaign trail in Scotland. The Labour leader is committed to the triple lock and not raising retirement age - Jeff J Mitchell/getty

The state pension could become unaffordable as soon as 2035 if Labour and the Tories pledge to protect the triple lock in their election manifestos.

The cost of paying the benefit will outstrip National Insurance Contributions (NICs) as the ratio of workers to pensioners shrinks, according to analysis for Telegraph Money by the Adam Smith Institute.

The think tank warned that the ballooning cost to taxpayers meant the state pension was “very likely” to become fiscally unsustainable between 2035 and 2045. It means action will have to be taken to cut the size and scope of the benefit.

Britain is already buckling under the strain of its state pension bill. Overall spending will be £23bn higher in 2027-28 than it was at the start of the 2020s, according to Office for Budget Responsibility (OBR) forecasts.

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An ageing population in increasingly poor health is expected to add even more pressure to the national finances. Pension spending has risen from 2pc of GDP in the early 1950s to more than 7pc today.

Currently, £1 in every £8 of government spending goes on the state pension. In 50 years, it will be more like £1 in every £6.

A fierce debate is raging over how to reform the system. But there are only a handful of options available – all of which are politically toxic – which experts believe will mean either more pain for taxpayers or the risk of poverty for pensioners.

Just keep working

One solution would be to make people work longer. The state pension age is already set to increase from 66 to 67 in 2028 and then to 68 by the mid-2040s.

Rising longevity for decades meant that raising the state pension age was the silver bullet that helped to keep the state pension system ticking along. But a recent dip in life expectancy has complicated the picture and forced Jeremy Hunt to delay a decision on whether to increase the state pension age for a second time.

Rachel Reeves, the shadow chancellor, has said that there is no justification to increase the state pension age if her party wins the General Election in July. In reality, Labour may have little choice.

According to the International Longevity Centre think tank, the state pension age would need to rise to 70 by 2040 to maintain the current ratio of workers per retiree.

As well as being deeply unpopular, this may prove unviable if people are not healthy enough to work.

Around 2.8 million people of working age are not in the workforce due to ill health, including mental health conditions such as anxiety and depression. This is up from around two million before the 2020 lockdown.

By the age of 70, only 50pc of adults in England and Wales are disability-free and able to work, official figures show.
This is part of the reason why raising the state pension age is risky.

Baroness Altmann, a former pensions minister, said further rises in the state pension age were “unconscionable” and would force many people in their 60s into poverty, particularly those unable to work.

She added: “Putting up the state pension age would be a disaster, the most terrible policy decision.

“It will mean that low earners and those with a limited healthy life expectancy wouldn’t even get a state pension or would get very little, whereas the healthiest and wealthiest would benefit the most.”

Tax raid

Another option is to raise taxes. NICs are not ring-fenced to fund the state pension. Instead, the money is taken from general taxation.

But comparing NICs and state pension obligations is often used as a yardstick to gauge affordability.

Maxwell Marlow, of the Adam Smith Institute, said: “No government department can run out of money. They can just keep on borrowing.

“But while the state pension won’t technically go bust, the amount of pain it will cause will be considerable.”

Yet Britons are already labouring under the heaviest tax burden since the 1940s, and squeezing more out of an already over-taxed population is not a long-term fix.

Although the average worker will enjoy a £450 annual boost to their earnings after the Chancellor Jeremy Hunt unveiled a 2p cut to National Insurance in March, workers and businesses have suffered a £100bn tax raid since 2019, according to the Institute for Fiscal Studies. This is equivalent to £3,500 per household.

Mr Marlow added that the growing imbalance between the numbers of pensioners and workers would inevitably result in taxpayers being leant on more.

He added: “Working-aged people are already taxed to the hilt in order to universally subsidise pensioners.

“This inherent unfairness within Britain’s economy will only become more entrenched when, as is expected, there are more Brits claiming their state pensions than there are working to pay for them.”

Triple lock straitjacket

Another lever the Government has to pull is the amount of money retirees are entitled to. At the centre of the debate is the controversial “triple lock”, which ensures state pension payments rise in line with the highest of inflation, average wage growth or 2.5pc every year.

Even though Mel Stride, the Work and Pensions Secretary, has admitted that the policy is “unsustainable in the long term”, both the Tories and Labour are expected to keep the triple lock in their election manifestos as they attempt to woo older voters. Neither party wants to be the one to scrap the generous entitlement.

But economists have warned that the guarantee will place an unsustainable burden on taxpayers.

OBR forecasts suggest that the triple lock will cost households around £10bn extra a year by 2034. It means annual spending on the state pension will soar past £150bn in real terms within a decade.

The current full state pension is £221.20 per week after rising by 8.5pc in April. At 30pc of average earnings, the new state pension is currently at a higher level than the basic state pension was at any point since at least 1968, thanks largely to the triple lock.

The policy will ensure the 4.3 million pensioners who receive the full state pension see a real weekly uplift of around £50 a week by 2034, which is around £11.30 per week higher than if the state pension rose in line with average wage growth – as was the case previously.

The IFS has urged the Government to scrap the triple lock and tie future state pension increases to earnings, a move that would save taxpayers billions of pounds, it said.

A wave of retiring Baby Boomers – born between 1946 and 1964 – is expected to push up the pensions bill dramatically this decade, while further depleting Britain’s dwindling workforce.

It means the question of how to save the state pension – for years dismissed as tomorrow’s problem by politicians – is coming into sharp focus.

Of all the unpalatable options available to policymakers, ditching the triple lock may be the most pragmatic.

Baroness Altmann said: “The 2.5pc [element of the triple lock] makes no sense whatsoever. It’s a number plucked out of thin air, if wages and prices are falling or keeping steady, why should the state pension go up?

“Promising 2.5pc when inflation falls below the bank’s inflation target of 2pc makes no sense, and it adds to long-term cost.”