Luís Teles Morais (Nova SBE)

The costs of building walls: immigration and the fiscal burden of aging in Europe

Luís Teles Morais
Nova SBE

Abstract

By how much can immigration relieve the burden of aging on public finances in Europe? Combining multiple survey data sources for the Euro area, we estimate the demographic profile of the budget and build customized population projections for each country, by age, gender, skill level, and country of birth groups. We then compute the fiscal imbalances implied by aging. Keeping net migration at its 2019 level, we find that restoring fiscal balance requires a permanent tax increase of 15 percent across all countries. Furthermore, we find that the relationship between the size of immigration and the fiscal burden of aging is negative, nonlinear, and convex. Building walls have high costs: prohibiting immigration would increase this measure by 20 percent (3 percentage points). In contrast, increasing immigration could help close the gap but with diminishing returns: doubling immigration flows would reduce it by 2.3 percentage points.

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