Abstract

The effect of accepting more immigrants on welfare in the presence of a pay-as-yougo social security system is analyzed qualitatively and quantitatively. First, it is shown that if initially there exist intergenerational government transfers from the young to the old, the government can lead an economy to the (modified) golden rule level within a finite time in a Pareto-improving way by increasing the percentage of immigrants to natives (PITN). Second, using the computational overlapping generation model, the welfare gain is calculated of increasing the PITN from 15.5 percent to 25.5 percent and years needed to reach the (modified) golden rule level in a Pareto-improving way in a model economy. The simulation shows that the present value of the welfare gain of increasing the PITN comprises 23 percent of the initial GDP. It takes 112 years for the model economy to reach the golden rule level in a Pareto-improving way.

Introduction

Transforming a pay-as-you-go(PYGO) social security system into a funded system is not easy. When the PYGO social security system is changed to a funded system, some generations must bear the so called “the double burden”, such that a young generation needs to pay the social security tax twice. Thus, although the transition from a PYGO social security to a funded system is desirable since a PYGO social security system causes under-accumulation of capital, it is difficult to transit in a Pareto-improving way.

2014.09

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