Immigration and the Pension System in Spain

Abstract In this paper we use a large overlapping generations model with individuals that differ across age, productivity and native status to assess the effects on the pension system of different immigration quotas in the context of an aging population by computing how much should social security taxes be rised in order to pay for the pension burden in two model economies. The first one is the standard model pioneered by Auerbach and Kotlikoff (1987) where skilled and unskilled workers are perfect substitutes in the production process. In the second model economy, individuals with different skill levels are imperfect substitutes as in Canova and Ravn (1998). The main result of the paper is that half of the reduction of the social security tax rate associated with immigration in the standard model is lost when skilled and unskilled individual are imperfect substitutes. Consequently, the standard model with perfect substitution overestimates the ability of immigration inflows to sustain the pension system in Spain.