Aging, Immigration and the Welfare State in Austria: Final Report ; Study on behalf of the OeNB

Abstract: Demographic changes are increasingly putting pressure on the financing of European welfare states. The increase in life expectancy and decrease in fertility lead to an overall population aging. Unchanged retirement behavior would lead to an increasing deficit in the financing of social insurances, including retirement pensions and medical care. As migrants are on average younger, more immigration could help reduce the age dependency ratio and improve the financing of social insurances. Several studies have quantified the effect of migration on the financing of the welfare state and evaluated pension reforms, but none considers endogenous retirement decisions. Yet, households adjust their behavior after policy reforms. This study is the first general equilibrium analysis of the effect of migration and aging on social security financing and of pension reforms with endogenous retirement decisions. It finds a small to moderate positive effect of migration in Austria and that medical care has an increasing role in the deficit of social security financing. The study finds that taking constant retirement age overestimates the benefit of migration. It also evaluates labor market impacts, including endogenous human capital accumulation.