This paper reviews “Can Immigration Alleviate the Demographic Burden?” (2000) by Holger Bonin, Bernd Raffelhüschen and Jan Walliser published in the Journal of Public Finance Analysis. The aim of the paper is to answer the question of how immigration affects the long term fiscal impact in Germany using the method of generational accounting in order to determine the net contributions of migration to the public sector. Thereby the paper considers the question of whether immigration can alleviate the demographic burden of the ageing society in Germany that is laid upon the pay-as-you-go financed social security system.
The idea that immigration might help to solve this problem lies at hand. Most approaches are static, cross-sectional, thereby do not take future consequences into consideration and are thus “inadequate” (Auerbach/Oreopoulus 2000, p. 124). The method of generational accounting is a dynamic approach based on the intertemporal budget constraint of the government and was introduced by Auerbach et a. (1991) in order to investigate the long-term sustainability of government finances by taking into account the aggregate present value of taxes minus transfers of all current and future generations as well as the present value of government consumption and debt (Bonin et al. 2000). They describe this as follows,
where denotes the present value of government consumption in year and the public debt, respectively. These aggregated prospective non-transfer expenditures are financed by the right-hand side of the equation which denotes , the number of residents born in who will die in and all future generations of residents times the present value per capita taxes they will pay in a life time ( . The last term of the equation then takes immigration into account, where is the amount of migrants times the present value per capita tax which they will pay in their lifetime, denoted by . The double summation allows the weighting of immigrant-specific generational accounts which are calculated by looking at average net taxes from different age groups and their mortality rates (Bonin et al. 2000).
Fiscal policies that keep this equation balanced, or in simple terms, do not spend more than they receive, are called sustainable. In the case of migration, the additional government spending induced by the migrants should be opposed to the additional tax revenues. If the generational accounts of the migrants are positive, the additional income is distributed to all future cohorts, which will then lower the life-cycle tax burden on the residents. Furthermore, immigrants and their children born in increase the number of future tax payers on which the burden of the intertemporal public budget constraint is distributed. Therefore, the net aggregation contribution of immigrants might be positive even when their net effect is negative.
In order to calculate the revenue side of the government budget constraint, Bonin et al. (2000) use a long-term projection of cohort-specific net payments, where future migrants are assumed to share the same characteristics as past migrants. They start in 1996 and make projections about the demographic and fiscal revenues, while differentiating between migrants and natives within each birth cohort. The children of the immigrants are assumed to have the same characteristics as the natives. They assume a fertility rate of 1.3 children, gradually adjusted mortality rates after Birg et al. (1998), as well as a net migration of 200,000 people, while taking into account that 90 percent of them are younger than 40 years, which, judging 18 years later, where fairly accurate assumptions. Furthermore, they assume immigration of up to 600,000 migrants from Eastern Europe with German ethnicity. In order to compare scenarios, they also compute one with zero and one with 300,000 net migration. Using data from the German Consumer Expenditure Survey, social security data, the German Socio-Economic Panel and school enrollment statistics they create cohort profiles using capital income tax payments, seigniorage, value-added taxes, excise taxes, insurance tax and payroll contributions to the social security insurance. For the expenditure side they look at recipients of social insurance, welfare benefits, housing, maternity and youth support as well as education attendance. Additional government spending is assumed to grow at the same rate as labor productivity; thus, migration will increase government spending.
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- Tobias Kohlstruck (Author), 2018, A review of "Can Immigration Alleviate the Demographic Burden", Munich, GRIN Verlag, https://www.grin.com/document/439090