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. 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 £119.30 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 £155.65 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 expect state pensions spending in 2016-17 to total £91.6 billion, with 12.9 million recipients paid an average of £7,100 each. That would represent around 12 per cent of total public spending, and is equivalent to £3,300 per household and 4.7 per cent of national income .

 

  • Recent trends

  • Latest forecast

    State pension spending is set rise by 14 per cent between 2016-17 and 2021-22. As that is slightly less than our forecast for nominal GDP growth, this represents a fall of around 0.1 per cent of GDP. This fall is mostly driven by lower caseloads as pressure from an ageing population is more than offset by ongoing rises in the state pension age, which is set to reach 66 for men and women by 2020. This is partly offset by awards rising faster than earnings at the start of the forecast due to the triple lock on uprating.

    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 2017 forecast revised down spending on state pensions by £0.7 billion in 2021-22 relative to the November 2016 forecast. Over the forecast period as a whole, we have revised spending down by £0.3 billion a year on average.

    The downward revision to state pensions spending reflects a number of factors. It appears that a higher proportion of people are choosing to defer their claim when they reach the state pension age, which reduces spending in the short term, while there is also evidence of a slightly higher mortality rate. In addition, we revised down our earnings growth forecast, which feeds through to lower state pensions spending via the triple lock on uprating.

    State pension: changes since previous forecast

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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 were not processed through the Budget/Autumn Statement policy costings process, 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 first review is taking place in 2017.

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