Working Paper: NBER ID: w12736
Authors: Martin S. Feldstein
Abstract: The ageing of the population presents a major fiscal challenge for the countries of Europe. The combination of increased longevity and a reduced birth rate will directly reduce the growth rates of the European economies by slowing the growth of the capital stock and by weakening the productivity of the labor force. This slower growth of GDP means a smaller tax base and less tax revenue. In addition, the current tax-financed systems of social pensions and health care will require substantial increases in the already high tax rates. The analysis in this paper shows that the common prescription of increased immigration would do little to reduce the future fiscal burden. The increased revenue from a large rise in immigration would finance only a small part of the coming rise in the cost of pension and health benefits. The only alternative to significantly higher tax rates or substantially lower retirement income is to shift from a pure tax-financed system to a mixed system that supplements the tax financed benefits with benefits based on increased saving financial investment.
Keywords: Aging; Economic Growth; Immigration; Fiscal Policy
JEL Codes: H2; H55; J61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Aging population (J11) | Slower growth rate of labor force (J21) |
| Slower growth rate of labor force (J21) | Depressed per capita income (I32) |
| Slower growth rate of labor force (J21) | Overall economic growth (O49) |
| Aging population (J11) | Lower national saving rate (E21) |
| Lower national saving rate (E21) | Decreased business investment in productivity-enhancing capital (E22) |
| Decreased business investment in productivity-enhancing capital (E22) | Reduced productivity (O49) |
| Reduced productivity (O49) | Lower economic growth (F69) |
| Aging population (J11) | Fiscal burden of pensions and healthcare (H55) |
| Fiscal burden of pensions and healthcare (H55) | Significant tax increases (H29) |
| Increased immigration (K37) | Marginally alleviate fiscal burden (H69) |