Population Aging, Social Security, and the New Immigration Policy in Germany

I construct a heterogeneous agent overlapping generations model with agents differing in age, origin (immigrant or native), and working ability. Calibrating the model to the German economy, I explicitly take into account differences in inter-generational transmission of working ability, fertility, and the main features of the German social security and tax systems. I analyze the impacts of exogenous immigration policy changes on the evolution of population, government accounts, and welfare along the transition path. I find that an inflow of high-skilled immigrants that is equal to 0.2 percent of the population per year increases welfare for all types of agents on the new balanced growth path (by 2.8 to 0.1 percent depending on the type of the agent). The key to the results is the interaction between the German pension system, equilibrium prices, and the decline in pensioner-contributor ratio. My results show that a reasonable immigrant inflow (0.2 percent of the population per year) may increase welfare and reinforce the sustainability of the social security system, which is in contrast to Fehr, Jokisch, and Kotlikoff (2004).