Commissioned by the Institute and Faculty of Actuaries (IFoA), the purpose of this paper is to explore the impacts of changes in migration flows – in particular, those resulting from possible migration policy changes after a UK exit (‘Brexit’) from the European Union (EU) – on the finances of the UK state pension system.
Migration is one of the central issues in the EU referendum debate. At NIESR we have carried out extensive research and analysis on migration and the impact of migration on the economy. One aspect which has not been considered to date is the extent to which migrants contribute to, and draw on, the state pension system. To our knowledge, this is the first research paper to quantify the possible impact of alternative migration scenarios on the pension system. To carry out this research we require some plausible alternative migration scenarios and a simulation model which differentiates the characteristics of EU and non-EU migrants and indigenous or native residents. We have presented three possible migration scenarios based of the volume of migrant flows, and a further three scenarios by assuming that the earnings of new migrants are significantly higher to simulate an ‘Australian-style’ points system.
Our main conclusions are that reductions in immigration would have a negative impact on the public finances. To offset these impacts policy change in the form of increases in national insurance contributions, reductions in pensioner benefits, or increases in the state pension age could be used. More restrictive immigration policies would, not surprisingly, have more negative impacts. However, these impacts could be mitigated, and indeed reversed, were the government to be able to successfully implement a very significant change in the incomes (and implicitly the skills or qualifications) of new migrants by introducing a skills or points based migration policy (perhaps similar to the policy in Australia). The reduction in EU migrants, an increase in total non EU migrants and an up-scaling of skills are all possible policies which have been aired in the referendum debate. However, an important policy question, which we do not address here, is whether these policies would and could actually be delivered in practice.
Watch Angus Armstrong discuss the research in this video