decreases the optimal tax rate in the "demographic steady" equilibrium path.
Aging affects the capital per (native-born) worker, and thus can move the
system from the "demographic switching" equilibrium path to the "demographic
steady" equilibrium path or vise versa, since the equilibrium paths are defined
over a closed range of the capital per (native-born) worker state variable.
6 Conclusion
In the political debate people express the idea that immigrants are good because
they can help pay for the old. We analyze a political economy mechanism
whereby the older are 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.
For this purpose we develop an OLG political economy model to explore
how immigration policy and a pay-as-you-go (PAYG) social security system are
jointly determined. The pay-as-you-go social security system employs payroll
taxes on the working young in order to finance a social-security benefit to the
aged. Immigrants enter the economy when young, and gain the right to vote only
in the next period, when old. Except from having a higher population growth
rate, they have the same preferences and contribute to and benefit from the
welfare state in the same way as the native-born. Their offspring are assumed
to be completely integrated into the country and have the same population
growth as the native-born.
The model is a political economy model where the political decisions regard-
ing labor taxation and immigration quotas are taken simultaneously, through
majority voting. Markov sub-game perfect political equilibria of the game fea-
ture a dynamic of repeated voting where individuals are forward looking, in the
sense that they take into account the effect of their current voting on the next
period voting decisions. The Markov sub-game perfect equilibria depend on the
state variables. When the immigration quotas is the only state variable, voters
engage in a "demographic switching" strategy in the sense that under the as-
sumption that immigrants gain the right to vote only in the next period when
they are old, voters take into account the effect of admitting a certain number
of immigrants on the composition of voters and their voting preferences in the
next period. Moreover, when the number of young exceeds the number of old,
the young, who is then the decisive voter, admits a limited number of immi-
grants, in order to manipulate next period decisive voter’s identity, switching
from young to old. In so doing the voter maximizes her next period benefits.
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