Research shows a potential drop in annual EU migration following Brexit could force the government to lower the state pension and further increase the age it can be accessed. Kristian Brunt-Seymour looks at the figures
At a glance:
- Loss of net budget revenue by 2032 could be £3.2bn
- Pensioner benefits could be reduced by 2.6% or state pension age increased by 0.4 years
- By 2057 the loss in pensioner benefits could be 3.6% of state pension. Age rise by an additional 1.1 years to make up for the budget shortfall
Immigration is one of the central issues in the debate on Britain's EU membership. With just a few weeks until voters go to the polls, the potential impact of an alternative migration scenario on the pension system has been relatively unexplored.
A report by the National Institute of Economic and Social Research (NIESR) found a potential reduction of the immigrant population by 2032 of 1.4 million following Brexit could force the government to make further changes to the state pension.
The Impact of Possible Migration Scenarios after 'Brexit' on the State Pension System report found it could lose over £3bn annually in lost taxes and benefits by 2032, rising to £8bn per year by 2057.
The research, commissioned by the Institute and Faculty of Actuaries (IFoA), focused primarily on two main scenarios out of a total six that each differ by number of flow of migrants.
The population projections by the Office for National Statistics (ONS) published in 2014 represents the base figures highlighted in the table below.
The ONS figures show the UK population would increase from 64.6 million to 72.7 million by 2034-39 if the UK votes to remain in the EU. In addition, net migration would decrease from 1.2 million to 0.9 million people by 2034-39.
The second main scenario in the NIESR report refers to a substantial decline in EU migration that could happen if the UK were to leave Europe and adopt a restrictive policy. In this circumstance, called scenario 1A, EU migration would decline to one third of the migration figures projected by the ONS in 2014, while non-EU migration would remain unchanged.
The report focused on the different effects on loss in government revenue between the ONS figures and the £12bn projected revenue loss if EU migration fell by 100,000 from 2017.
To offset the impact of the extra costs, the report said the government could exercise various levers. This includes increasing the state pension age, reducing the state pension for new pensioners or increasing national insurance contributions (NIC).
Under scenario 1A the short-term effect up to 2032 could lead to a potential 0.8% increase in NIC, a reduction in the value of the state pension by 2.6% or increasing the state pension age by 0.4 years if Brexit occurred.
However, NIESR director of macroeconomics and the report co-author Dr Angus Armstrong says the long-term impact of EU migration up to 2057 is harder to predict.
This includes a potential £8.1bn net budget loss including contributed pensions and in-work benefits following a Brexit by 2057.
"What we tried to do under the various migration scenarios is to have various implications on what it might mean to reach state pension age," he says. "If you were to increase the pensionable age by 0.4 years you would expect people to change their behaviour in terms of saving or their working patterns depending on this.
"The problem is the potential reaction to the policy isn't often taken into account in research. However, there's a behavioural response we've woven into the research model."
However, the research also notes government spending on state benefits would increase by £94bn by 2057 regardless of immigration changes following a potential Brexit, based on the 2014 ONS figures.
These show government expenditure from increasing the state pension age on both contributory pensions (£171bn) and other benefits (£9bn) totalling £180bn by 2032. Subtracting this £180bn from the same groups of figures in 2057, totalling £274bn, would get the increase in state retirement benefits of £94bn.
Under any of the scenarios in the report, the increase in the cost of contributory pensions is likely to rise from 171bn to 263bn between 2032 and 2057 irrespective of the migration policy.
"The £4.5bn fall in revenues up to 2057 (under scenario 1A) is insignificant compared to the potential increase in state retirement benefits irrespective of what you do with migrants. As a result, this £94bn pension hole is something the government will need to respond to at some point," Armstrong said.
Hargreaves Lansdown head of retirement policy Tom McPhail agrees fewer workers from a reduction in EU migration would mean fewer tax revenues for the government but adds there are many uncertainties around Brexit.
"There are so many moving parts involved [with Brexit] and I think we need to treat these projections with a healthy degree of scepticism," he says.
"I cannot see the government reducing the state pension by £300 a year. It seems highly unlikely the government would grasp that nettle but it's much more likely it would adjust the state pension age upwards. You don't need to adjust the pension age dial a great distance to have a very significant impact on expenditure."
"Brexit could result in lower migration from the EU but the British government even outside the EU would have capacity to influence if not have greater control over net migration than it currently does and it could stimulate from the EU," he adds.
With the state pension costing around £90bn a year and 800,000 people reaching state pension age, a small adjustment in the age range could have a big effect on government revenue. Whatever happens on 23 June, the government has got the necessary tools in place to make whatever adjustments it feels appropriate in response to circumstances.
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