4.1 Demographics
It is seen that the sustainable tax rate is very sensitive to longevity. With
no increases in expected life span, the sustainable tax is only marginally ab ove
the current rate (1.6 percentage points) while in the base case the difference is
7.5 percentage points. Under UN pro jections implying about the double growth
in life expectancy the tax increase needed is about 16.7 percentage point. This
shows how sensitive public finances are to changes in the balances between the
number of years a person is net-contributor to the financing and the number
of years as net-beneficiary. Note that the projections are made under an as-
sumption of unchanged eligibility ages for early retirement and pensions. This
shows that a major part of the financing problem arises from the need to deal
with the fact that future generations would have higher longevity than current
generations.
Table 1 also shows that changes in fertility would only have a minor effect on
the sustainable tax rate, whereas it would obviously have some effect on taxes
under PAYG-financing. Increased fertility worsens the sustainability problem
because future generations are expected to live longer.
Permanent changes in immigration only have marginal long-term effects on
the demographic composition of the population. Critical for the effects on the
financing problem is the labour market attachment of immigrants and their
descendants20. This is so since universal welfare arrangements in Denmark pro-
vide entitlements to (almost) all individuals and compensate for lack of income,
whereas financing goes via taxes levied on income generated in the market.
Assessed from current experiences with the labour market performance of im-
migrants, it follows that increased immigration from highly developed countries
would hardly affect the sustainable tax rate.
A permanent increase in immigration from less developed countries would
worsen the sustainability problem due to the low employment frequency of this
group. If their employment possibilities could be improved, it would clearly
contribute to lowering the sustainability problem.
Finally, increased emigration could worsen the sustainability problem, in
particular since the emigration propensity is larger for highly educated. Cur-
rently, return migration is at a high level, but to the extent this changes, the
sustainability problem worsens. In short this is so since an investment is made
in education, which is not paid back later in the form of tax payments arising
from employment.
In sum, public finances are vulnerable if immigration is by groups with low
employment rates and emigration is by the better educated. Continued glob-
alization must be expected to lead to increases in migration flows, although
immigration can be affected politically.
Growth
It is often hypothesized that growth will automatically create more leeway
in public finances. Accordingly, proposals for structural reforms strengthen-
20 Labour force participation is 85% for males and 76% for females. For immigrants from
more developed countries the corresponding figures are 69% and 57% and from less developed
countries 59% and 41%.
21