The Role of Immigration in Sustaining the Social Security System: A Political Economy Approach

CESifo Working Paper No. 1979

The Role of Immigration in Sustaining the
Social Security System:

A Political Economy Approach

Abstract

In the political debate people express the idea that immigrants are good because they can help
pay for the old. The paper explores this idea in a dynamic political-economy setup. We
characterize sub-game perfect Markov equilibria where immigration policy and pay-as-you-
go (PAYG) social security system are jointly determined through a majority voting process.
The main feature of the model is that immigrants are desirable for the sustainability of the
social security system, because the political system is able to manipulate the ratio of old to
young and thereby the coalition which supports future high social security benefits. We
demonstrate that the older is the native born population the more likely is that the immigration
policy is liberalized; which in turn has a positive effect on the sustainability of the social
security system.

JEL Code: H10.

April 23, 2007

We acknowledge Steve Coate and Jose-Victor Rios-Rull for insightful comments.

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