- OECD says the state pension triple lock should be reformed over time.
- Think tank also suggests reviewing VAT exemptions if more tax revenue is needed.
- Government insists the triple lock will remain in place throughout this Parliament.
The Organisation of Economic Co-operation and Development (OECD) has urged the UK to begin preparing for reforms to the state pension triple lock, warning that the policy is placing growing pressure on public spending and increasing long-term fiscal risks.
In its latest report on the UK economy, the Paris-based organisation said the government should continue pursuing reforms to improve economic growth and living standards. Among its recommendations is a review of the triple lock, which guarantees the state pension rises each year by the highest of inflation, wage growth or 2.5 per cent.
The OECD described the policy as "unusually generous" compared with pension systems in many other countries and said it leaves public finances more exposed to economic shocks. It added that while the government's commitment to keep the triple lock throughout the current Parliament should be honoured, ministers should begin laying the groundwork for a longer-term replacement that is both fair and publicly acceptable.
The recommendation follows similar concerns raised by the Office for Budget Responsibility (OBR), which recently warned that the triple lock is becoming a significant driver of future government spending. The OBR estimates the policy will add around £15.5 billion a year to state pension spending by 2029-30, compared with the original estimate of £5.2 billion.
VAT changes also suggested
The OECD also said the government could consider reviewing existing VAT exemptions if additional tax revenue becomes necessary. It argued that broadening the VAT base would be a more effective option than raising National Insurance, which it said could further increase labour costs after recent changes.
The report stated that if tax rises become unavoidable, increasing VAT would be the more prudent approach. However, it cautioned against further National Insurance increases because they could weigh on employment and business costs.
Responding to the report, Pensions Minister Torsten Bell reportedly said the government's manifesto commitment to the triple lock remains unchanged and will be honoured throughout this Parliament.
Bell also said the government's priority is reforming the private pensions system to encourage more people to save for retirement. On the OECD's VAT recommendation, he reportedly argued that it would not be the right time to increase VAT after the cost-of-living crisis while the Bank of England continues efforts to bring inflation back to target.
Addressing questions about recent National Insurance increases, Bell reportedly acknowledged they carry economic consequences but said they are helping fund investment in public services, adding that strengthening public services supports long-term economic growth.
