Impacts on pensions
152. It is frequently argued that immigrants
are needed to defuse the "pensions time bomb" by helping
to support an increasing population of elderly people in the UK.
This argument is usually made in the context of Britain's rising
dependency ratiothe ratio of pensioners and children to
the working age population. The IPPR presented estimates of the
income tax increases required to help maintain the UK pension
system if net immigration was to decline (p 302).
153. A number of witnesses suggested that the
argument that immigrants are needed to help maintain the UK pension
system is greatly overstated. First, immigrants too grow old and
eventually add to the old-age population drawing pensions.
154. Second, as Lord Turner of Ecchinswell pointed
out in his recent lecture at the London School of Economics (LSE),
arguments for high immigration to reduce the dependency ratio
are usually made on the basis of figures which assume that the
retirement age remains unchanged, an assumption he described as
"absurd".[63]
Lord Turner argued that as people live longer, it is reasonable
to assume that the extra years of life are divided between working
years and retirement so as to keep roughly stable the proportions
of life spent working and retired. Under this assumption, half
of the projected increase in the dependency ratio disappears,
when compared with the simplistic case in which the retirement
age stays unchanged.
155. This principle of proportionally measuring
retirement ages is reflected in government policy for the state
pension age, which will now rise from today's level of 60 for
women and 65 for men, to reach 68 by 2046. This is appropriately
reflected in the GAD's latest 2006-based projections for the dependency
ratio. As a result, despite the fact that the latest projections
incorporate higher than previous estimates of life expectancy,
the 2006 Projections (shown in Table 5) show lower increases in
dependency ratios than previous projections. As Professor Rowthorn
pointed out, the latest projections suggest that in the "zero
migration" scenario (zero immigration and zero emigration)
the dependency ratio is now projected to rise from 60.7% in 2006
to 73.6% in 2056, and not the 82.4% predicted under the 2004-based
projections, which made the unrealistic assumption of an unchanging
retirement age. A more reasonable "balanced" scenario
(zero net migration with immigration equal to emigration) produced
by Professor Rowthorn, suggests a dependency ratio increase to
68.2% (p 26).
156. It should be noted, however, that the 2006-based
projections still overstate the very long-term dependency burden,
since they assume that increases in retirement age will cease
after 2046 (the furthest date covered by present legislation).
On the more realistic assumption that by 2056 a further year will
have been added to state pension age (taking it to 69) in line
with the principle of fixed working / retirement proportions,
the Principal Projection dependency ratio at 61.0% will be only
minimally higher than in 2006, and even zero migration will produce
a figure of about 70%.
157. It does not therefore seem reasonable to
argue that immigration at or above the current Principal Projection
level of 190,000 a year is essential to avoid an unsustainable
increase in the dependency ratio. And, as Lord Turner pointed
out, a policy of seeking to keep the dependency ratio down via
high immigration would require not just a period of high immigration
and population growth, but permanent population growth and an
ever increasing absolute level of net immigration given that immigrants
themselves grow old.
158. Arguments in favour of high immigration
to defuse the "pensions time bomb" do not stand up to
scrutiny as they are based on the unreasonable assumption of a
static retirement age as people live longer, and ignore the fact
that, in time, immigrants too will grow old and draw pensions.
Increasing the official retirement age will significantly reduce
the increase in the dependency ratio and is the only viable way
to do so.
TABLE 5
Projected changes in the UK's dependency
ratios* (%), 2006-2056
|
| | Dependants per 100 working age pop.
|
| Assumed net
annual immigration
(millions)
| | | (GAD Figure)
| (SPA=69) |
| | 2006
| 2031 | 2056
| 2056 |
|
High Migration | 0.250
| 60.7 | 63.1
| 62.9 | 60.0
|
Principal Projection | 0.190
| 60.7 | 63.9
| 63.9 | 61.0
|
Low Migration | 0.130
| 60.7 | 64.6
| 65.1 | 62.2
|
No migration (natural change only) | 0
| 60.7 | 68.2
| 73.6 | 70.2
|
Balanced Migration | 0
| 60.7 | 66.5
| 68.2 | n/a
|
|
*The total dependency ratio is defined as the number of children
plus pensioners divided by the working age population. The GAD
figures define the upper age limit of the working population as
the State Pension Age, which will rise to 66 in 2026, 67 in 2036
and 68 in 2046. The first four scenarios are from the GAD 2006
based projections. The Balanced Immigration scenario is from Professor
Rowthorna dependency ratio for 2056 with a state pension
age of 69 was not available. (p 27) SPAState Pension Age.
55