In this article, IF researcher Conor Nakkan, considers how reforms to the State Pension could help to boost spending on defence.
A generational challenge
In February, Sir Keir Starmer announced what he described as the “biggest sustained increase in defence spending since the end of the cold war.” Under this plan, the UK will spend 2.5% of GDP on defence by 2027. This accelerates a previous Conservative commitment to reach the same target by 2030. For context, last year, NATO estimated that the UK spent just over 2.3% of GDP on defence. This is equivalent to around £53.9 billion. The proposed uplift is expected to result in an additional £6 billion of defence spending per year from 2027.
In justifying these changes, Starmer argued that “a generational challenge requires a generational response.” At the Intergenerational Foundation (IF), we broadly agree with this sentiment. Younger generations are facing an increasingly uncertain, insecure, and dangerous world. However, how we respond to this challenge matters. If tough fiscal decisions need to be made about how the UK can sustainably invest in its long-term national security, those decisions must be considered through the lens of intergenerational fairness.
Aid cuts
Given the tight fiscal rules the government has set for itself, how will it fund the proposed increase in defence spending? In the first instance, by further shrinking the already diminished foreign aid budget. The government will reduce aid spending from 0.5% of gross national income (GNI) to 0.3% in 2027. The UK previously spent 0.7% of GNI on aid every year from 2013 to 2020.
These aid cuts led to the resignation of the International Development Minister, Anneliese Dodds. She worried that the cuts would not only undermine the UK’s global reputation, but would also harm vulnerable people in developing countries who rely on UK-funded humanitarian aid and development assistance. The cuts have also been widely criticised by aid charities, who stated that the reduction “will have devastating consequences for millions of marginalised people worldwide.”
The future target
In addition to its 2027 commitment, the government has also pledged to increase defence spending to 3% of GDP at some point during next Parliament. However, this commitment is qualified by the caveat that it will occur “as economic and fiscal conditions allow.” It is worth noting that a remarkably similar commitment has been made regarding the restoration of aid spending to 0.7% of GNI. The government says this increase will also happen “as soon as fiscal circumstances allow.” What exactly would constitute such favourable economic or fiscal conditions seems to be a somewhat open question at this stage.
Nonetheless, what would a further increase in defence spending from 2.5% to 3% of GDP actually look like? We can use rough estimates to get a sense of the scale. If raising defence spending from 2.3% to 2.5% of GDP in 2027 equates to around £6 billion, then increasing it from 2.5% to 3% would require a further £15 billion per year. How might the government fund this additional spending?
Re-examine the fiscal rules
The government could, as Anneliese Dodds recommended in her resignation letter, revisit its fiscal rules or increase taxes. Indeed, she highlighted that there is a strong rationale for doing so, given the significant changes in the global economic and strategic environment since Labour were elected. The UK faces a range of pressing and “unprecedented” domestic and international challenges. And all the potential options should be on the table to respond.
To put it plainly, it will be difficult to meaningfully rebuild and restore sovereign security and defence capabilities while adhering to what increasingly appears to be a set of arbitrary fiscal targets set for five years’ time. These considerations should prompt us to reassess the broader purpose of strict fiscal rules and ask whether they necessarily ought to take precedence over priorities like national security.
However, as Rachel Reeves recently outlined in the Spring Statement, the government remain steadfastly committed to their fiscal rules and are unwilling to break their election commitments on taxation. With these constraints in mind, one particular area of government spending stands out from the perspective of intergenerational fairness: the State Pension.
The State Pension
The triple lock on the State Pension was introduced in 2011. It guarantees that the State Pension increases annually by the highest of earnings growth, inflation, or 2.5%. This mechanism ensures that pension increases outpace each of these individual factors in isolation.
The impact of the triple lock is evident in the substantial rise in the State Pension rates. Between 2011–12 and 2024–25, the basic State Pension (for those who reached retirement age before April 2016) rose from £102.15 to £169.50 per week, a 66% increase. The new State Pension (introduced in 2016) increased from £155.65 to £221.20 per week, a 42% rise. These increases far exceed the average wage growth and inflation rates over the same period.
IF has long argued that the triple lock is neither fiscally sustainable nor intergenerationally fair. In April 2024, the Department for Work and Pensions (DWP) projected total State Pension expenditure for 2024/25 would reach £137 billion. The Office for Budget Responsibility (OBR) forecasts that government spending on State Pensions will increase from around 4.9% of GDP in 2023-24 to 7.9% by 2073-74. As the OBR points out, this substantial increase is driven by both the ageing of the population and the rising cost of the triple lock.
Reforming the State Pension
There are several ways to reform the State Pension system to deliver savings that could be used to offset future increases in defence spending. One option could be to uprate the State Pension in line with either earnings or the Consumer Price Index (CPI). Some estimates suggest this approach could yield annual savings of around £10 billion. Other analysis from the Institute for Fiscal Studies (IFS) highlights that maintaining the triple lock, rather than switching to earnings-based uprating, could cost up to £40 billion by 2050.
A more modest reform would be to move to a ‘double lock’ system, in which the State Pension increases by the higher of earnings or prices, effectively removing the 2.5% minimum floor. Estimates suggest this could save at least £3.6 billion per year. An alternative could involve annual uprating by CPI, with the long-term aim of pegging the State Pension to 33% of median national earnings. If, over a five-year period, the State Pension falls below this threshold, it would be increased accordingly. This model would mirror the approach used by the Low Pay Commission to adjust the National Minimum Wage.
Look to Australia?
A more ambitious reform would be the introduction of means-testing, ensuring that the wealthiest pensioners do not receive the full State Pension. One potential reform pathway could be to move towards the Australian Age Pension system. Under this system, the government guarantees a minimum level of income in retirement but adjusts payments based on an individual’s income and assets.
Admittedly, there are limited publicly available estimates on the potential savings from introducing means-testing in the UK. However, some broad insights can be gathered from international comparisons. As noted above, the OBR projects that UK State Pension spending will rise from 4.9% of GDP in 2023–24 to 7.9% by 2073–74. In contrast, Australia expects its Age Pension spending to fall from 2.3% of GDP in 2022–23 to just 2.0% by 2062–63. These figures suggest that means-testing could, under the right circumstances, deliver significant savings.
Ultimately, ensuring Britain’s national security should not come at the expense of younger generations, who already face mounting economic challenges. Indeed, as Janan Ganesh of the Financial Times recently put it, asking the young and working-age population to potentially “bear arms” while also keeping “the old in a certain style…is more than even Lord Kitchener asked.”
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Image courtesy of: SAC Tim Laurence RAF/MOD, OGL 2 <http://www.nationalarchives.gov.uk/doc/open-government-licence/version/2>, via Wikimedia Commons
