It's been claimed that reducing migration into the UK may cause a budget shortfall that could require the state pension to be cut.

According to a study by the Institute and Faculty of Actuaries (IFoA), the impact on benefit expenditure and tax revenues could cost the government more than £3 billion a year by 2032, if EU migration into the UK dropped by 150,000 a year. By 2057, that could spike to £8 billion per year.

“One aspect of migration policy that has not been considered to date is the extent to which migrants contribute to, and draw on, the state pension system,” said Dr Angus Armstrong, director of macroeconomics at the National Institute of Economic and Social Research (NIESR) and co-author of the IFoA’s report.

A reduction in immigration would mean fewer people paying taxes. The IFoA suggests that this could lead to a significant budget shortfall and, by 2057, the government could be forced to look at ways to make up the difference.

[Related story: Investigation launched into occupational pensions over funding fears]

What might be done about it?

Options that could be considered include raising the state pension age by one year from 68 to 69. Alternatively, the government could reduce the amount paid to new pensioners. The report says that pensions would have to be cut by 3.5% to make up the shortfall, costing pensioners £300 a year.

Another option might be to increase National Insurance Contributions by close to 1.5%, so that the Government has enough money coming in to meet the State Pension bill.

“We are conscious that immigration is a major aspect of the EU referendum debate, and the IFoA has commissioned this research to address this important topic,” says Derek Cribb, chief executive of the IFoA.

 “Our research shows that if the government were to reduce immigration by around 150,000 there could be implications for the state pension system.”

[Related story: Tens of thousands to miss out on new state pension]

Other points to consider

However, a reduction in migration may not have negative effects on the state purse. The research also looked into what would happen if the UK was to introduce a points-based immigration system similar to the one in Australia.

This could mitigate or even reverse the effects of reduced migration, it suggested. While the UK would be allowing fewer immigrants into the country, those that did come in would have a higher earnings profile, so would pay more tax.

 “There is of course uncertainty associated with long-term projections,” said Armstrong. “Our analysis takes into account how people are likely to respond to each of the policy options in terms of how much they save and work. This gives us a more complete picture of the overall likely economic impact of possible changes in immigration policy.”

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