Marie Louise Schultz-Nielsen and Torben Tranæs have published a paper (Working Paper nr. 30, Rockwool Foundation, Research Unit, Copenhagen, 2014) investigating immigration as a solution to the challenges that an aging population represents. The paper is in Danish, but I think their research deserves a wider audience. Their investigation poses the question of whether immigration from different parts of the world can contribute to the financial challenges that an aging population represents. Secondly, the paper investigates how the annual net contribution changes over time, and what the average contribution is from ethnic Danes, Western immigrants and non-Western immigrants . That way, the different sizes of the groups and the changes of net contribution over the life span are taken into account. Finally, it investigates how changes in immigration affect the public finances.
Data and Method
Calculations are based on the economic model DREAM (Danish Rational Economic Agents Model). On the basis of a projection of the demographic composition of the Danish population (educational level and employment rate), estimates of the long-term economic activity and the sustainability of finance policies are made. In other words, the model evaluates whether future revenues will cover future expenses.
Gender, ethnic origin, age, disposable income, proportion of total population/adult population are used as “principles of distribution” in the “generation accounts”. The variables measuring income and expenses include:
Incomes: Income tax, sales tax, labour market taxes, interests, contributions to social insurance schemes and foreign capital.
Expenses: Pensions, unemployment benefits, activation of unemployed, non-income individual provisions (e.g. health, education, social benefits, student benefits) and collective provisions (more detailed accounts, including numbers, are provided in the paper).
Table1: Population in Denmark, according to country of origin. Table composed by blogger.
As ethnic Danes make up 89% of the population in Denmark, the main bulk of public expenses stems from this group. In total, the contribution of Danes is slightly lower than the total expenses they encur. In 2014 an annual negative net contribution of -19.8 billion Dkr (divide by 8 to transfer into £) is expected of Danes. In contrast, Western immigrants show a positive net contribution of 5.2 billion Dkr, while Western descendants have a negative net contribution of -1.4billion Dkr. In total, people of Western origin show a positive net contribution of 3.8 billion Dkr.
The net contribution of people of non-Western origin is negative, in total -16.6 billion Dkr. Non-Western immigrants’ net-contribution is -4.1 billion Dkr against descendants’ -12.5 billion Dkr.
The lower net contribution of non-Western than Western immigrants is not ascribed to age, but to non-Western immigrants’ lower attachment to the labour market, which precipitates lower tax revenues and higher social expenses.
The calculations of the annual contributions are strongly affected by the size and age composition of the groups. If one wants to know, what the average person from a specific group contributes to the public finances, it can be advantageous to make an estimate over the life span of the individual person. In that way one takes into account the different sizes of the groups and the fact that a person’s net contribution fluctuates during the life span. Table 2 displays average net contribution by origin.
Table 2: Present value of the average net contribution per life-year for generation 2013. 2013 level.
In the estimation below, the labour market participation of refugees is adjusted to the labour market participation of non-Western immigrants, who are not refugees. In other words, it is calculated what the net-contribution would have been, if refugees participated equally much in the labour market as other non-Western immigrants.
Figure 1: Age determined employment rate in 2012, percentage.
The graph shows that after adjustment the average employment rate for persons over 30 increases significantly. Among non-Western immigrants below 30 years of age, the rate drops after adjustment because this section of the young non-Western immigrants in Denmark are students. In total, the adjustment for refugees results in an increase in the employment. The consequence of this is an improvement of the average net contribution for non-Western immigrants.
- No indication that immigration of non-Western immigrants will produce a surplus to the public finances (not even 35 years ahead) unless integration of this group improves. Non-Western immigrants will only add to the problem of financing the welfare state.
- In contrast, Western immigrants will become an even more important source of financing for the welfare state.
- By 2050 the negative net contribution from non-Western descendants will have turned into a positive contribution (6.2 billlion Dkr). On the other hand, the deficit today (4.1 billion Dkr) will increase to 12.2 billion Dkr by 2050 as the first generation of immigrants has started to leave the labour market.
- The calculations illustrate that if a welfare society wants to achieve a positive contribution to the government finances through immigration, then the first generation entering the country must deliver a surplus. If the first generation produces a deficit – or just balances the accounts – the coming generations will at best manage as well as those with a Danish background born in Denmark. A possible surplus must be in place by the first generation, if the total exercise must result in an economic surplus financing a welfare state such as the Danish.
- The analysis also shows that non-Western immigrants have come a long way compared to their parents regarding their economic relationship with the welfare state. Even though the public finances paid for their upbringing, the non-Western descendants are less of a burden for the public finances than their parents.
- Compared with the parent generation the contribution of Non-Western descendants to the public finances is closer to the contribution of Danes. This is due to the poor integration of the first generation of immigrants into the labour market in the past and presently. They arrived with poor skills not matching the demands of the Danish labour market. The difference between descendants and the parent generation is also due to the fact that descendants have distanced themselves significantly from their parents.
 Immigrants: Defined as people born abroad whose parents were both (or in cases where only one parent is known, that parent) foreign nationals or born abroad. This concept covers both immigration due to work, family reunification and refugees
Descendants: People born in Denmark where both parents are born outside Denmark and were non-Danish citizens at the time of birth of the descendant (ibid, 2001).
Non-Western immigrant: In Denmark a Western immigrant is defined as originating from an EU country, Andorra, Iceland, Liechtenstein, Monaco, Norway, San Marino, Switzerland, The Vatican, USA, Canada, Australia and New Zealand. A non-Western immigrant is from all countries other than those listed above (Statistics Denmark, 2009).
Ethnic Danes: People born to parents of whom at least one is a Danish citizen born in Denmark (Statistics Denmark, 2009).