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

1 Introduction

Economic analysis of the intergenerational and intragenerational aspects of the
sustainability of social security has had a revival of sorts in recent time. At-
tention focuses on the direct impact of the population aging on pay-as-you-go
social security system. In this context, migration is regarded by many as one of
the necessary factors for the sustainability of the system, since it tend to reverse
some consequences of the aging process. The purpose of this paper is to study
how a political-economy equilibrium model, in which both migration and taxes
interact, focusing on the intergenerational aspect of social security, works in the
presence of aging.

All over the world, declining population growth rates and rising life ex-
pectancy trigger political-economy forces, which are likely to transform the so-
cial security system, as we know it. Due to these demographic changes, the
EU population, in particular, is undergoing a long term trend of ageing, leading
to a likely fall in the working population in the 25 states from 303 million to
297 million by 2020. Two main aspects of the aging process are relevant to the
political sustainability of social security systems. From an economic perspec-
tive, a rise in the dependency ratio (i.e., the proportion of retirees per worker)
increases the number of people drawing from the system; while it decreases
the number of contributors. From a political perspective, the older is the me-
dian voter, the more relevant is the pension spending in the political agenda.
These two contradicting effects induced by the process of aging, which results
in higher demand for, and lower supply of, social security influence also the
political-economy debate about migration.

There is a large controversy in the economic literature regarding the overall
fiscal influence of migration on host economies. Some argue that the net tax
revenue generated by immigrants is not significant because immigrants consume
much of the benefits they produce- especially in terms of health care and educa-
tion. However, especially in light of the rapid demographic changes, migration
is often viewed as a policy that may come to the rescue of pay-as-you-go social
security systems, at least in the short run. This view reflects the fact that the
flow of immigrants can alleviate the current demographic imbalance, by influ-
encing the age structure of the host economy. Therefore, even if migration does
not provide in itself a full-fledged long-term solution to falling birth rates and
ageing population, migration policy is considered to be one of the available tools
within a broader policy mix (such as a policy which admits immigrants based
on their skills).

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