Countries more often than not enact migration quotas, which are being de-
cided upon in the political system. Thus, immigration must be viewed as an
endogenous policy variable in the general equilibrium-political economy system,
as much as the level of social security itself. The present paper assumes that
both migration and social security policy variables as endogenous. It focuses
on the pure intergenerational aspects of the migration cum social security sus-
tainability. To isolate the intergenerational aspects we abstract from intragen-
erational income transfers considerations. The basic elements are of the model
are standard in this literature. There is a pay-as-you-go social security system,
which employs payroll taxes (at a flat rate) on a representative working young
in order to finance a uniform benefit to the aged population. Immigrants enter
the economy when young, and gain the right to vote only in the next period,
when old. A crucial assumption, which derives the voter’s strategy, is that im-
migrants have a higher population growth rate than the native-born. Thus,
immigration is assumed to influence the age structure of the host economy, by
effecting not only the current but also the future dependency ratio. Offspring of
immigrants are assumed to be completely integrated into the country and have
the same population growth as the native-born. The tax-migration policy is en-
dogenously determined both by conventional effect on wages, savings, etc., and
by strategic considerations, concerning the effect of the current tax-migration
policy on the next period tax-migration policy. The model generates several
equilibrium types. When the current migration policy is the only state variable,
the Markov sub-game perfect equilibrium is characterized by a "demographic
switching" strategy, where the young decisive voter admits only a limited num-
ber of immigrants, in order to change the decisive voter’s identity from young
to old in the next period. This strategy reflects the fact that immigrants are
admitted in the host economy, because the political system is able to manipu-
late the ratio of old to young and thereby the coalition, which supports future
high social security benefits. When next period capital per (native-born) worker
is an additional state variable, there is yet another channel of influence of the
current period policy variables on next period policy variables through savings.
Thus, the young decisive voter may adopt a "demographic steady" strategy,
where she admits the maximum amount of immigrant. In so doing the young
decisive voter renders a majority for the young, every period. In this case, both
"demographic switching" and "demographic steady" strategies are incorporated
in the same equilibrium.
To understand the "demographic switching" strategy, we begin with a base
line model, with no private saving traded assets, in which next period policy