The Treasury manages public spending within two ‘control totals’ of about equal size:

  • departmental expenditure limits (DELs) – mostly covering spending on public services, grants and administration (collectively termed ‘resource’ spending) and investment (‘capital’ spending). These are items that can be planned over extended periods.
  • annually managed expenditure (AME) – categories of spending less amenable to multi-year planning, such as social security spending and debt interest.

Social security and tax credits together are the biggest source of AME spending, with state pensions spending the biggest item in the social security budget (accounting for over 40 per cent of the total). For people reaching the state pension age before April 2016, there were two tiers to the state pension: the basic state pension (which currently pays £125.95 a week) and additional state pensions related to earnings. For people reaching the state pension age from April 2016 onwards, a new single-tier state pension (which currently pays £164.35 a week) has replaced the two-tier system. The state pension is uprated each year in line with the ‘triple lock’ that states it will rise by the highest of CPI inflation, average earnings growth or 2.5 per cent – a more generous uprating policy than for working-age benefits and tax credits or child benefit.

In our latest forecast, we estimate outturn spending on state pensions in 2017-18 to total £93.8 billion in Great Britain. We forecast spending to increase to £96.6 billion in 2018-19, with 12.7 million recipients paid an average of £7,610 each. That would represent around 12 per cent of total public spending, and 4.6 per cent of national income.

  • Latest forecast

    State pension spending is set to rise by 14.1 per cent between 2018-19 and 2022-23. As that is slightly higher than our forecast for nominal GDP growth, this represents an increase of close to 0.1 per cent of GDP. This modest increase is driven by increases in the share of pensioners in the population once the increase in the state pension age (SPA) has completed in 2020. The ONS population projections that underpin our forecast show the share of pension-age individuals in the population falling by around 0.9 percentage points between 2017 and 2020 as changes to the SPA are implemented. Thereafter, the share increases by 0.5 percentage points between 2020 and 2023.

    There is a significant increase in forecast spending between 2020-21 and 2021-22. Paragraphs 5.18 and 5.19 of our November 2016 Economic and Fiscal Outlook explain how we expect the state pension caseload to rise more quickly from 2020-21 onwards as the effects of ageing will not be offset by further rises in the state pension age until 2028.

     

    Our March 2018 forecast revised up spending on state pensions by £0.1 billion in 2022-23 relative to the November 2017 forecast. Over the forecast period as a whole, we revised spending up by £0.4 billion a year on average.

    The upward revision to state pensions spending reflected higher-than-expected spending in 2017-18 feeding through to later years. In addition, changes to our average earnings growth forecast first boosted uprating via the triple lock before reducing it.

    State pension: changes since previous forecast

    state pension

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  • Previous forecasts

    Our forecast for state pension spending has been revised down in most of our recent forecasts. This can partly be explained by higher-than-expected mortality rates, which reduce the caseload. Downward revisions to productivity and earnings growth also reduce cash spending on state pensions spending via the earnings element of the triple lock on uprating.

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  • Policy measures

    Since our first forecast in June 2010, the Coalition and Conservative Governments have announced two policy measures affecting our forecast for state pension spending. The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Annex A of the relevant Economic and fiscal outlook.

    The two state pension policy changes since 2010 were:

    • The introduction of the triple lock. This was announced in the June 2010 Budget and guarantees that state pension awards rise by the highest of CPI inflation, average earnings growth or 2.5 per cent each year.
    • The introduction of the single-tier pension. Under the Pensions Act 2014, the existing two-tier pension system has been replaced by a single-tier pension, which has applied to newly retiring pensioners since April 2016. This combines the basic state pension and state second pension into a flat-rate pension set above the basic level of means-tested support. It therefore increases state pensions spending but reduces pension credit spending.

    Other policies that affect state pension spending, but that did not do so within the five-year forecast period at the time of their announcement, include:

    • Raising the SPA for women to equalise it with that for men at age 65 by 2018 (originally announced in Pensions Act 1995 and accelerated in Pensions Act 2011);
    • Raising the SPA for both men and women to 66 between 2018 and 2020 (also announced in Pensions Act 2011); and
    • Legislating for a review of the SPA at least once every six years – based on a technical assessment by the Government Actuary and an additional report considering other relevant factors. The findings of the first review were announced in July 2017 and were accompanied by a change in the timetable for increases in the SPA, with the increase to 68 now taking place in 2037-39 rather than 2044-46.

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