The Ageing Population Problem

After the release of our paper, Funding Pensions in Scotland: Would Independence Matter?, I was called to the Scottish Affairs Committee at Westminster to give evidence. The most interesting issue that we discussed was the level of net migration into Scotland that we would need to see in order to eliminate the cost differences that are projected between Scotland and the UK, and eliminating the costs of an ageing population.

In our paper we calculate, assuming a constant cost per pensioner and a constant tax per worker, the evolution of the cost of the state pension as a percentage of total government tax revenues over the period 2012 – 2062, by projecting forward using the ONS 2012 Principle Projection. The results are shown in the following chart.

result from pensions paper

The saw-toothed pattern is due to the rise in the state pension age to age 66 and then 67. As can be seen, Scotland and the UK currently are very similar in terms of pension cost per unit tax, but Scotland’s costs rise faster due to its demographic profile. However, the difference in the costs between Scotland and the UK (which peaks at 0.8% in 2036) are much smaller than the change in costs in the UK (a rise of 6.7% from 11.8% in 2012 to 18.5% in 2062).

In this post, I discuss what additional immigration is needed into Scotland to eliminate the difference between Scotland and the UK (i.e. so that the solid line for Scotland in the chart above tracks the dotted line for the UK), and what additional immigration is needed into Scotland to eliminate the costs of an ageing population (i.e. so that the pension cost per unit tax is kept around 11.8%).

Assuming that the UK numbers are generated using the ONS 2012 Principle Projection, the increase in net migration that Scotland would need to see to eliminate the difference between Scotland and the UK is relatively modest. The following chart shows net migration over the decade to 2012 as well as net migration for Scotland in ONS 2012 Principle Projection, and net migration needed to eliminate the cost differential with the UK. As can be seen, eliminating the cost differential basically means a semi-permanent return to the experience of 2002-12. If we assume that emigration at the level of the 2002-12 average continues, then the extra immigration (over the level of migration in the ONS 2012) needed to eliminate the Scotland – UK cost gap constitutes a 9% rise in annual immigration (more than an extra 8,000 immigrants per annum, onto total annual immigration of more than 80,000).

net migration to eliminate diffImplementing this level of net migration eliminates the difference in cost between Scotland and the UK, but it does not eliminate the costs associated with an ageing population which, as we have seen, are very substantial in the UK. How much immigration would be needed to eliminate this problem in Scotland? Again assuming emigration from Scotland stays at the average level of 2002-12, the following charts show the level of immigration required and the pension cost per unit tax revenue.

immigration to eliminate ageeliminate ageing resultWhilst implementing this level of immigration eliminates the problem of an ageing population by keeping the pension cost as a percentage of tax revenues low in this simple modelling exercise, is it a feasible exercise in the real world? It represents an increase in immigration of 68,000[1] per annum (about +80%) on top of the ONS 2012 Principle Projection immigration flows. This level of immigration may or may not be politically feasible – especially as vastly different immigration policy could threaten an independent Scotland’s membership of a Common Travel Area with rUK and Ireland.

It does however seem clear that, given it only requires Scotland to continue with the net migration levels of the past decade, eliminating the pensions cost gap between Scotland and the UK using more liberal immigration policy should be very possible and completely politically feasible.

[1] I estimated 60,000 in my evidence to the Select Committee.

About David Comerford

Post-doctoral researcher in economics
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  1. Pingback: The future costs of the State Pension | The Economics of Constitutional Change

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