The migration challenge for PAYG

Abstract

Immigration has been popularised in the economics literature as a tool that could be used to balance troubled PAYG pension systems. Pivotal research by Razin and Sadka shows that unskilled immigration can overcome the pension problem and, further, boost the general welfare in the host economy. However, a large strand of current economics research is engaged in identifying mechanisms through which unskilled immigration, while solving the pension problem, is causing undesired shifts in general welfare. This work shows that recurring unskilled immigration will not only reduce the general welfare but may also be challenging the pension system by reducing the pension benefits themselves. Further interpreting the actual data, it is suggested that immigration policies are designed either based on public finances only or in a political environment of gerontocracy.

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Fig. 1

Notes

  1. 1.

    Certainly, the assumed perfect substitutability of skilled and unskilled workers causes obvious limitations in the model. However, there are two main reasons for this assumption: First, the current assumption makes the comparison of the results with the main body of the literature straightforward (as the assumption is the most common), and second, the empirical literature on the topic has not yet identified the exact relationship (e.g. Okkerse 2008).

  2. 2.

    The Bismarckian factor (Cremer and Pestieau 1998) is a measure of the actuarial fairness of a pension systems. It takes values between 0 and 1, with 0 characterising a purely redistributive (demogrant, Beveridgean) pension system and 1—a strictly actuarially fair (earnings related, Bismarckian) pension system. In the present stylised model, the Bismarckian factor can be presented as τ er/(τ er + τ d).

  3. 3.

    This result could be used to explain the extra mobility restrictions that the UK employs for immigrants from the new EU member states—Bulgaria, Croatia and Romania.

  4. 4.

    The result is surely bounded by many modelling assumptions, such as the absence of altruism towards future population or the absence of the possibility for the future population to reverse the results (such as the repetitive voting considered in Razin et al. (2011)).

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Acknowledgements

This paper has benefited from comments by Byeongju Jeong, Randall K. Filer, Sergey Slobodyan, Jan Kmenta and Andrea Downing as well as the editor—Alessandro Cigno—and two anonymous referees. Any error remaining is the sole responsibility of the author.

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Correspondence to Gurgen Aslanyan.

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Responsible editor: Alessandro Cigno

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Aslanyan, G. The migration challenge for PAYG. J Popul Econ 27, 1023–1038 (2014). https://doi.org/10.1007/s00148-014-0516-x

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Keywords

  • Public pensions
  • PAYG
  • Unskilled migration
  • Capital dilution

AMS 2000 Subject Classification

  • J18
  • F22
  • H55