The latest skirmish in the economics of independence wars relates to the state pension. Specifically, which government would pay State Pensions in an independent Scotland.
Ian Blackford maintains that the UK government will pay the State Pension to Scottish residents who qualify for a UK state pension through their pre-independence national insurance contributions (NICs).
But state pensions are not paid for from a “pot” that individuals build up during their working lives. Instead they are paid using money from today’s taxes and borrowing – a pay-as-you-go scheme. Since individuals have no ownership rights over their past contributions, the UK Government can change the qualifying rules for state pensions as its sees fit. Recent and proposed increases in the qualifying retirement age are examples of it such rule-changes. The State Pension is simply a benefit that UK government could reduce, or even, in principle, eliminate.
This pay-as-you-go aspect might seem to negate any commitment of the UK government to pay the State Pension in an independent Scotland – even to pensioners who contributed NICs and other taxes to the UK government during their working lives. The UK government could argue that the tax and NICs made by Scottish residents were used to pay for public services that they previously enjoyed. Under this view, the Scottish Government would become responsible for paying the state pensions of qualifying Scottish residents from its own revenues post-independence.
But this is not the whole story. UK government pays State Pensions to those who retire abroad (providing that they have made sufficient qualifying NICS). Therefore if the UK government pays the State Pension to an individual living in, say, France, it would seem inconsistent for it not to pay the State Pension to an individual with a similar NICs record living in an independent Scotland[i].
It is this point that the SNP is now using to argue that the responsibility for paying the State Pension in an independent Scotland – for those who have sufficient NI contributions – would fall to the UK government.
The UK government is likely to argue that succession – and the wholesale transfer of the UK’s tax base to the Scottish government – constitutes an unprecedented change in circumstances that renders comparisons with the treatment of individuals under current state pension policy irrelevant.
The issue would therefore become a matter for wider negotiations around the division of assets and liabilities in general, and reciprocity agreements for social security more specifically.
The UK has social security agreements with many countries. These stipulate how state pensions will be calculated when individuals have made contributions in more than one country. Similar agreements between the UK and an independent Scotland will be necessary to deal with individuals retiring post-independence who have made NI contributions in both Scotland and the UK. The UK had such agreements with EU countries before Brexit, and maintained similar arrangements in the Trade and Co-operation Agreement between the UK and EU. The UK also has social security agreements with other countries, including the US and Australia.
There would clearly be pressure on an independent Scotland to make such an agreement with the remaining UK. The absence of an agreement would be an impediment to cross-border trade with potentially harmful economic effects.
In the post-independence long run, as those who have paid NICs to the UK government die off, the cost of supporting the state pension in Scotland will unambiguously fall on the Scottish Government. In the short run, the Scottish government might refuse to contribute to these costs, but if it did so, there would be implications for the broader settlement. This final agreement is impossible to anticipate though it is worth noting that there is no arbitration procedure for the break-up of a state, in which case the outcome will likely depend on which party has most to lose by a failure to agree.
In summary, the question of which government would be liable for the State Pension in an independent Scotland is both more complex and more uncertain than either ‘side’ might claim. And it likely cannot be resolved in isolation from other questions.
David Bell is Professor of Economics at the University of Stirling
David Eiser is Senior Knowledge Exchange Fellow at Fraser of Allander Institute
This article will appear on the Fraser of Allander website at noon today.
[i] The question of citizenship in an independent Scotland is immaterial to this analysis. Under current state pension rules, it is NICs rather than citizenship that determines eligibility. Thus whether an individual in an independent Scotland has Scottish, UK or dual citizenship (or any other nationality) would not under current policy influence eligibility for the state pension.