Only immigrants can save us from pensioners

We have known for years to expect the deluge of baby boomers starting to claim retirement benefits, but it always seemed so far away. Not any more, we have reached the cliff edge.

The Government recently announced that the number of over 65s in the UK is set to rise by 150,000 this year alone. The trend of rising retirees is set to continue for the next 20 years at least, especially as people continue to live longer.

This is good news for retired people who no longer have to haul themselves to work every day, but it could spell disaster for the economy. The problem is that retired people cost a lot through pensions, healthcare, welfare allowances.

As a civilized country we want to give our oldest people the best possible living standards in old age. So making retirement economically feasible is the biggest challenge for this Government and many in the future.

[Related story: Record numbers will retire this year]

How to afford them
Fundamentally, pensioners are expensive. As well as the state pension and things like the winter fuel allowance that are paid out directly to those in retirement, there are a string of other costs to the Government that rise with age – healthcare not least among them.

Worse, all of this extra spending is funded by current tax incomes. While some countries – including Norway – put national insurance payments from citizens aside into a fund that will be used to pay pensions in future, we don’t. So more retired people means more cost going out of the Treasury and less money coming in through wages.

Everything from means-testing pension allowances to indexing payments based on the number of children the retiree has have been proposed as a way to deal with this issue.

However, the best way to avoid a fiscal disaster is to ensure that the number of people working in the UK and paying taxes rises. And to do this we need immigration.

[Related feature: ‘Baby boomers are very privileged human beings’]

Why immigrants are the answer
The UK’s birth rate has been falling consistently since peaking in 1950, so the Government will have to rely on immigration to keep the number of people working (and paying taxes) high enough to fund those in retirement.

Economic immigration as well as young people from overseas looking for a better life could all help ease the looming demographics problem faced by the UK.

But immigration is a sensitive subject. When the Conservative/ Liberal Democrat Coalition came to power in 2010 one of its main policies was to reduce migration to the UK, especially from outside the EU. Politically popular yes, but it could end up being an economic nightmare as pension and healthcare bills stack up.

Like a lot of the Government’s recent policies, the migration cap has failed to meet targets and so far there has been no notable drop in immigration to the UK.

The latest immigration data available from the Office for National Statistics found that total long-term immigration to the UK in the 12 months to June 2011 (this data is collected with a lag) was 593,000, against 582,000 in the 12 months to June 2010. The ONS said that immigration had remained at a similar level since 2004.

The juiciest figure for the UK’s pension economists was the news that 690,000 national insurance numbers were allocated to non-UK nationals in the year to September 2011, which is an increase of 11% from the year before.

This potentially means more tax revenues pouring into the Treasury’s coffers in the coming years as these migrants get jobs.

[Related feature: Children destined to be poorer than their parents]

The right sort of immigrant
There are some positive aspects of the plan to cap migration, though. Firstly, the cap is not in place for high earning migrants who earn more than £150,000 per year. So bankers, lawyers and others with high salaries are free to come and live in the UK (and pay us tax) whenever they want.

Added to that, scientists and research and development professionals are also excluded from the cap, which is good news as the UK tries to shift its economy away from over-reliance on the financial sector.

Science and R&D projects can be economically lucrative and if the UK can present itself as an international hub for these projects it could reap long-term economic benefits that will help to balance the UK’s economy and at the same time make the cost of an aging population easier to bear.

Immigration is part of the solution to how we deal with our changing demographics. If we stop people coming to this country then one of the side effects will be that our worker/dependency ratio will shrink rapidly, as the number of workers covering the benefits of the very old and young shrinks.

This is the case in countries where immigration levels are low. For example, Japan’s aging population are one of the reasons for its “lost decade” of economic growth.

If we let this problem go unresolved then it risks igniting an inter-generational war as the young feel increasingly unhappy with having to bear the burden of the old, without a chance of being able to enjoy the same benefits.

Immigration is a complex social issue, and this article does not wish to wade into the political or social side of the debate. Instead it is merely looking at immigration as a potential solution to a very worrying problem starring the UK in the face right now.

[Related link: Could you boost your pensions 40%]