Reducing Immigration Could Mean that We Will All Be Working until Our 70s
Moving the Finish Lines
A strange thing has started happening to me recently. I’ve started getting envious of my parents’ retirement lifestyles. Don’t get me wrong. I enjoy my work at Regeneris. But watching them take up new hobbies, eating out and enjoying more holidays has got me looking forward to the days when I don’t need to worry about 9 to 5 working or rainy commutes (all too frequent in Manchester).
But I could have a long wait. Longer life expectancies and increased pressure on public finances has already meant that the Government is planning to progressively increase the State Pension Age (SPA) from its current level of 65 to 68 by 2046 (when I will be 66!).
Now, with the decision to leave the EU and the Government’s commitment to reduce international immigration to the “tens of thousands” (confirmed again recently at the Conservative Party conference), I may need to prepare myself for a longer run to the finishing line.
What does immigration have to do with it?
One of the main benefits of immigration is that people moving to the UK tend to be young (72% of immigrants over the past 10 years have been aged 16-64) and have high employment rates. This means they are less likely to use public services or receive benefits and more likely to pay taxes. It also means they are helping to ensure a balance between the most productive part of the population (working age people) and those who are typically not in the workforce (young people and old people above retirement age).
The balance between these two groups is called the dependency ratio. Essentially, the dependency ratio is the number of retirees and children in relation to the working age population, and this is an important measure for understanding the potential strain on public finances in the future. The ratio is currently at 58% and has only changed a little since 2000. However, this will all change over the next 15 years as the baby-boomer generation reaches retirement age, which will swell the numbers of older people.
By reducing the flow of young people to the UK, a migration cap would mean that the dependency ratio increases. The graph below shows how it could change using two scenarios about net migration.
The low scenario is based on the Government’s target of 100,000 per annum, while the high scenario is based on the current level of around 300,000 per annum. After allowing for planned changes in the SPA, the low migration scenario would result in a dependency ratio of 63% by 2030; nearly 3.5 percentage points higher than the high scenario, and 69% by 2040; nearly 6 percentage points higher than the high scenario.
Source: Regeneris calculations using Popgroup and assumptions from ONS sub-national population projections 2014
What Is the Impact on Public Finances?
At first glance these may look like small changes but could have a major impact on public finances. To balance the budget, current and future governments would be faced with one of three options:
1. Increase the retirement age even further and faster: The Pensions Act 2014 provides for a regular review of the SPA at least once every five years. A substantial reduction in immigration could force the Government’s hand to increase it further. To maintain the dependency ratio at its current level we estimate the SPA would need to increase to 71 in the late 2030s.
2. Reduce public spending: The Government may need to reduce benefits or look for public sector efficiencies to reduce public spending to a more sustainable level.
3. Improving health: Investing more in preventative health campaigns to encourage people to exercise regularly and eat healthier diets would reduce pressure on the NHS (which would lead to savings) and ensure that more older workers are able to work until retirement age (or beyond).
4. Increase taxation: Finally there is the option of increasing taxation among working people and corporations to help cover the increased costs of an ageing population.
The Government could therefore be faced with some tough choices. Many of these options would be politically unpopular, particularly if the burden falls on younger people (the majority of whom voted to remain in the EU).
The lesson for the rest of us is to get saving, cut back on foreign holidays and eating out. There will be plenty of time for that when you are retired. Are you prepared to continue working in your 70s?
Regeneris are experts in demographic forecasting and identifying the implications for local economies, labour and housing markets. For more information on our work, please contact Oliver Chapman.