The Office for Budget Responsibility (OBR) has just released their latest fiscal risks and sustainability report. This report provides a detailed analysis of some of the long-term risks facing the UK’s public finances. In this article, IF researcher, Conor Nakkan, unpacks some of the report’s main findings and explains why it strengthens the case to reform the State Pension.
The parlous state of the public finances
At the outset, the OBR notes that the UK’s public finances are in a “vulnerable position.” The UK government’s deficit, for instance, reached 5.7 per cent of GDP by the end of 2024. To put this figure in context, this deficit was the third highest among 28 advanced European economies, and fifth highest out of 36 advanced economies.
Likewise, UK government debt is currently around 94 per cent of GDP. This means the UK is the fourth most indebted advanced European economy, and sixth most indebted advanced economy (behind Japan, Greece, Italy, France, and the US). Perhaps most worryingly, the UK also currently faces some of the highest borrowing costs among advanced economies. As it stands, only New Zealand and Iceland face higher government borrowing costs.
Global and domestic drivers
These figures partly reflect the impacts of major global shocks, including the Covid pandemic and energy crisis. But the OBR is clear that domestic policy choices have also played an important role. Successive governments have failed to consolidate the public finances, especially in the aftermath of these kinds of shocks. Planned tax rises have been reversed. Planned spending cuts have been abandoned. And while eight of the last nine fiscal frameworks included a commitment to reduce some measure of debt as a share of GDP, that objective has not been met.
Over the past 15 years, underlying debt has risen by 24 per cent of GDP. Over the past 20 years, it has increased by 60 per cent. This reflects not only the cost of responding to recent crises, but also a steady loosening of fiscal rules to accommodate higher structural borrowing.
According to the OBR, this matters because persistent deficits and rising debt have “substantially eroded” the UK’s capacity to respond to future shocks. Underlying debt is now at its highest level since the early 1960s. At the same time, economic growth has slowed, interest rates have risen, and public expectations of what government should deliver remain high.
Despite the tax-to-GDP ratio reaching a post-war high, the OBR suggests that borrowing remains around 3 per cent of GDP above the level needed to stabilise debt. In other words, even near record levels of taxation are not enough to sustainably cover the cost of existing spending commitments.
As IF has previously argued, this fiscal situation poses a challenge for younger and future generations. For one thing, persistently high levels of borrowing today means a heavier debt burden tomorrow. Now, if this borrowing is used to fund investments that expand the productive capacity of the economy, younger and future generations may be better off as a result. But those benefits are unlikely to materialise if borrowing continues to finance rising spending on pensions and other age-related entitlements.
The pensions system: three main risks
Given this fiscal backdrop, the OBR singles out the UK’s pensions system as one of the most significant long-term pressures on the public finances. They identify three key risks:
- A significant increase in the direct fiscal cost of the State Pension, driven by demographic change and the triple lock;
- Inadequate private pension saving among some groups, increasing the risk of future state dependency; and
- The structural decline of defined benefit (DB) pensions, which is weakening demand for government debt and could lead to higher borrowing costs.
In what follows, I take a closer look at the first of these pressures, and explain why the triple lock uprating mechanism is unsustainable, unpredictable, and unfair.
The State Pension
The State Pension is already one of the UK government’s largest areas of spending. It currently costs around £138 billion a year, or roughly 5 per cent of GDP. According to the OBR’s central projection, this will rise to 7.7 per cent of GDP by the early 2070s – an increase of over 50 per cent relative to today.
This rise is being driven not only by demographic pressures, such as a growing pensioner population and rising life expectancy, but also by the triple lock: a policy that guarantees the State Pension increases each year by the highest of average earnings growth, inflation, or 2.5 per cent.
Why the triple lock is unsustainable
When the triple lock was introduced, it was forecast to modestly increase the generosity of the State Pension over time. But it has proven significantly more expensive than expected. The OBR now estimates that the policy will cost £15.5 billion a year by 2029–30. This is nearly three times higher than the £5.2 billion originally forecast at the time of its implementation.
Looking further ahead, the impact of the triple lock on public finances becomes even more significant. Of the projected increase in State Pension spending from 5 to 7.7 per cent of GDP over the next 50 years, the OBR attributes 1.6 percentage points to the triple lock, with the remaining 1.1 percentage points reflecting demographic changes.
This means that the triple lock alone accounts for well over half of the projected increase in State Pension spending. In a context where underlying debt is already approaching 100 per cent of GDP, and pressures on other parts of government spending such as health and defence are also intensifying, the triple lock seems increasingly unaffordable. On this point, the OBR concludes if the current State Pension policy settings are maintained, “debt would be on an unsustainable path.”
Why the triple lock is unpredictable
The OBR also highlights how the triple lock introduces significant uncertainty into long-term fiscal planning. Because the uprating is tied to the highest of earnings, inflation, or 2.5 per cent, the cost of the State Pension becomes highly sensitive to economic volatility. For instance, since 2010, the 2.5 per cent or inflation element has driven uprating in 8 of 13 years. This has resulted in larger and more volatile increases than originally anticipated.
To assess the long-term fiscal risk, the OBR also models different future scenarios. If macroeconomic volatility remains at post-2010 levels, State Pension spending could rise to 9.1 per cent of GDP by the early 2070s. If volatility instead falls back to pre-2010 levels, spending could fall to 6.3 per cent of GDP. That’s a range of 2.8 percentage points of GDP. To appreciate the magnitude of these figures, consider that in 2023-24, the UK government spent around 2.1 per cent of GDP on defence, 0.6 per cent on environmental protection, and 0.7 per cent on housing and community amenities.
Why the triple lock is unfair
Finally, the triple lock raises serious concerns about intergenerational fairness. While it has helped reduce pensioner poverty, it now delivers large, untargeted gains to all pensioners, including those who are already well-off. In other words, given that the State Pension is not means-tested, every pensioner receives the same uplift, regardless of income, assets, or broader financial circumstances. This includes those with substantial private pension incomes or significant housing wealth, who are often among the wealthiest households in the country.
Meanwhile, younger generations face a very different set of economic circumstances. As recent research by IF has demonstrated, young people in the UK are falling further behind older generations. Despite becoming more educated, young people today face higher levels of unemployment, greater job insecurity, and relatively stagnant wages. They are less likely to own a home and more likely to spend the majority of their income on essentials. At the same time, they are saddled with rising student debt burdens and face high marginal tax rates. Moreover, three in ten children in the UK currently live in poverty, while government spending is increasingly skewed towards the old.
How to reform the State Pension
For all these kinds of reasons, IF has long argued that the triple lock must be removed. Indeed, there are a range of alternative uprating mechanisms that could reduce the fiscal pressure arising from the State Pension. These include either earnings- or inflation-based uprating, or uprating by the average of the two. Some have proposed a “double lock”, which removes the arbitrary 2.5 per cent floor. Others have proposed a “smoothed earnings link,” where the State Pension is set as a percentage of national median earnings and protected from inflation.
Each option comes with trade-offs, and future IF research will examine these in detail. But what is clear from the OBR’s latest report is that the status quo cannot hold. Reforming the triple lock is no longer just a matter of balancing the fiscal books, it is one of the most urgent challenges in restoring intergenerational fairness to the UK’s public finances.
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