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



Mulligan (1998)). See also Galasso and Profeta (2002) for a survey.

Migration is often viewed as an economic force, which can mitigate the fiscal
burden induced by the process of aging since an inflow of young working age
immigrants may slow down population aging and help paying for social security.
Because immigrants often have low education and high fertility rates, their net
fiscal impact may be costly rather than beneficial. Storesletten (2000) and Lee
and Miller (2000) calibrate a general equilibrium overlapping generations model
to investigates whether a reform of immigration policies could resolve the fiscal
problems associated with the aging. Storesletten finds that selective immigra-
tion policies, involving increased inflow of working-age high and medium-skilled
immigrants, can remove the need for a future fiscal reform. Lee and Miller on the
other hand reach the conclusion that since immigrants have lower education and
higher fertility rates than that of the native-born, a higher amount of immigrant
admitted into the economy will east temporarily the projected fiscal burden of
retiring baby boomers in few decades although its overall fiscal consequences
would be quite small. Feldstein (2006) argues that the common prescription of
increased immigration would do little to reduce the future fiscal burden, and
that the only alternative is to shift from a pure tax-financed system to a mixed
system that supplements the tax financed benefits with benefits based on in-
creased saving financial investment. Razin and Sadka (2000, 2004) address the
issue of the fiscal burden associated with immigrants in a pay-as-you-go fiscal
system. They show that the additional obligation of the fiscal system to pay
pension benefits to the incoming migrants, when they retire, could be shifted
forward indefinitely. If, hypothetically, the world would come to a stop at a cer-
tain point of time in the future, the young generation at that point would bear
the deferred cost of the present migration. But in an ever-lasting economy, the
migrants, by supplying work and helping the financing the pension benefit of
period zero to native-born retirees, are a boon to the host country population:
old, young, and future generations.

A pioneering paper which studied immigration policy in a political economy
setup was the paper by Benhabib (1997). He examines the determination of im-
migration policies that impose capital and skill (human capital) requirements on
heterogeneous immigrants through majority voting process. The model demon-
strates that the native born population will be polarized between those who
would like an immigration policy to maximize the domestic capital-labor ratio
and those who would like to minimize it. Dolmas and Huffman (2004) and
Ortega (2005) add another angle to the political debate and model the joint de-
cisions over immigration quotas and redistributive tax policy. Both address the



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