Only Migration Can Save the Welfare State

In the coming decades, the developed world will face a daunting demographic challenge. As life expectancy goes up and fertility rates go down in North America, Europe, and the Pacific nations of Australia, Japan, and New Zealand, older, retirement-age populations will grow while labor forces shrink. Rich countries, in other words, are running out of young people. 

My son is 30 years old. By the time he reaches the age of 60 in 2050, his entire generation will have to cope with the consequences of the coming demographic deficit. Programs such as Social Security and Medicare that support the elderly in the United States may prove impossible to fund. At the same time, a shortage of young workers will leave crucial gaps in the labor market, especially when it comes to caring for the elderly.

The solution is at once simple and politically challenging: in the coming decades, rich countries should open their borders to more workers from poorer countries. At a time of rising nativism and xenophobia, calling for increased immigration may be unpopular. To allay legitimate concerns about rapid cultural change, developed nations can borrow from existing models of migration—in particular, those of Canada, Singapore, and Persian Gulf countries—that meet the demands of labor markets without upsetting social cohesion. It will be difficult to convince publics to accept more migrants, but wealthy countries don’t have much of a choice. If they can’t attract more workers from elsewhere, they will face demographic disaster.  

THE GRAYING OF THE WEST

One way to understand the immense need for migrants in wealthy countries is to calculate the result of their absence. What would happen if the developed world shut its borders and didn’t take in more migrants? UN population projections paint a stark picture of current demographic trends in the developed world. Thanks to decreasing fertility and increasing longevity rates, wealthy countries will cumulatively have 120 million fewer people between the ages of 25 and 64 in 2050 than they had in 2020, an 18 percent decrease.

As working-age populations slump across the developed world, longer lifespans will boost the population of people over the age of 65 by a total of 95 million by 2050, a 38 percent increase. The ranks of those over 80 will swell by 61 million, a 91 percent increase. All told, the population above age 65 in rich countries will go up by around 95 million, while in the absence of migration, these economies will lose 120 million working-age people.

These radical demographic changes raise several major concerns. Every developed country has a social security scheme that seeks to guarantee income for people in old age. Such schemes, whether public or private, almost always depend on collecting contributions from the young to support the old. Similarly, health-care costs are much higher for the old than they are for the young, so nearly every wealthy country relies on contributions from the young to cover the health-care costs of the old. And as people get very old, they require more labor-intensive support—from personal care to household help to health care. A modern economy has to be able to supply the labor to meet the growing demands of an aging populace.

A modern economy has to supply the labor to meet the demands of an aging populace.

With declining working-age populations and growing elderly populations, these traditional arrangements in wealthy countries face the possibility of collapse. Back when the demographic pyramid had a broad base—many more young people than old people—these systems of social protection for the elderly were able to function at relatively low cost. In the developed world, the ratio of people between the ages of 25 and 64 to those 65 and up was 5.7 to 1 in 1960 and 4.16 to 1 in 1990. But in the last 30 years, that ratio has fallen to 2.76 to 1. If wealthy countries don’t bring in additional migrants, that ratio will drop to only 1.65 to 1 by 2050—making it impossible to sustain social protections at current contribution levels.  

How rich countries cope with this demographic transformation should be a matter of pressing policy concern. And yet politicians rarely tackle the subject head-on because the potential solutions are difficult, if not altogether impossible, to sell to their domestic constituents. It is unlikely, for instance, that leaders could convince their populations to offset a shrinking labor force with higher taxes. In many European countries, the ratios of tax revenue to GDP are already near, or above, 40 percent. The average tax-to-GDP ratio across the wealthy member states of the Organization for Economic Cooperation and Development is around 34 percent, a figure that has barely changed since the late 1980s despite the fiscal squeezes that aging populations are already enforcing around the world. That inflexibility suggests that it will be hard to convince publics to raise taxes much higher than they already are in any OECD country.

Another way to brace for the deficit of working people is to cut benefits for the elderly—but that is easier said than done. French President Emmanuel Macron recently joined the ranks of the many politicians chastened in their attempts to trim pension benefits; he ultimately capitulated to massive strikes protesting a proposed increase in the retirement age. As populations grow older, it will become even harder for leaders to cut pension, social security, and health benefits for the elderly.

WORKERS OF THE WORLD, MIGRATE!

But what if migrants filled the gap in the labor force? To maintain the current ratio of working-age people to people 65 and up—2.76 to 1—the labor force in the developed world would need to grow by roughly 260 million workers by 2050. But rich countries are currently on track to have 120 million fewer workers. In other words, by 2050, 380 million foreign workers would need to move to rich countries in order to make up for the labor shortfall.   

Would it be possible to attract this huge number of workers? That number of required workers—380 million—may seem daunting; it is about triple the total number of people born in poor countries who are currently living and working in rich countries. But there is a coming boom in potential workers. Outside of the developed world (and with the exception of China, whose demographics reflect the impact of decades of the “one-child policy”), the rest of the world is not aging nearly as quickly as are wealthy countries; indeed, many countries are experiencing a “youth bulge,” with disproportionately high numbers of young people. In the developing world, the number of working-age people will grow by 1.75 billion between now and 2050. Policymakers worry about creating enough jobs for all of them. 

A large number of these workers will want to move to wealthy countries, a fact that is well documented in public opinion polls. Studies suggest that the typical low- to medium-skilled worker would earn between $15,000 and $30,000 more (even adjusted to purchasing power differences) doing the same work in a rich country than in a poor country. Economists call that figure the “place premium,” representing how the arbitrary facts of nationality and the geography of birth shape the economic prospects of workers. 

MAKING MIGRATION PALATABLE

Wealthy countries need more immigrants. People in poorer countries want to go to wealthy ones. But the politics of labor mobility lags behind the economic realities. If anything, the populations of wealthy countries are growing more hostile to the idea of welcoming greater numbers of foreigners. Part of that resistance to migration is rooted in closely held notions of national identity. Many Germans, Scots, Japanese, Swiss, and others believe that their identities underpin “ways of life” in need of preservation. In their view, uncontrolled or very high levels of migration would undermine a sense of shared belonging and tradition. There are certainly racists and xenophobes in wealthy countries, but it is both unfair and counterproductive to dismiss these cultural concerns as illegitimate. The need for migrants in wealthy countries seems at loggerheads with the political imperative to maintain social cohesion.

But necessity is the mother of invention. Thirty years ago, it would have been impossible to imagine that Japan, famous for its restrictive immigration policies and commitment to protect a distinctive culture, would look to bilateral agreements with developing countries such as Nepal to draw temporary migrants. But Japan has already reached a point where it has fewer than two working-age people for every person over 65; that ratio represents a crisis. Every developed country is headed in Japan’s direction and will have to consider loosening restrictions on immigration.

One solution, which Australia and Canada have used for decades, is a “points based” immigration system to determine which prospective migrants are most likely to contribute economically and to integrate socially and politically. This system has allowed Canada to welcome a fairly high proportion of foreign-born workers without inflaming domestic political tensions. But the Canadian model has several downsides. It doesn’t meet the real demand for low- and medium-skilled workers. It also results in brain drain in the developing world, taking those who would contribute the most in their home countries. And it’s unlikely that this model, which is intended to pave the path for citizenship for migrants, can accommodate the enormous numbers of workers that demographic realities will eventually demand.

Every developed country will have to consider loosening restrictions on immigration.

An alternative model is visible in countries such as Singapore and the Gulf states that have low barriers to entry for foreign-born workers but allow them only a temporary status and little prospect of permanent residence, never mind citizenship. This model has been successful in maintaining social cohesion in these countries as well as very high levels of social welfare protection for citizens (in the United Arab Emirates, only 11.5 percent of the population has citizenship). But the system can also be exploitative; regarding the treatment of migrants in the Gulf, for instance, critics point to meager rights protections and a long track record of abuse of laborers.

In the coming years, wealthy countries should adopt elements of both models of labor mobility, using a points-based system to steer those migrants on a path to citizenship and more temporary and rotational schemes of labor mobility to attract medium- and low-skilled labor. To succeed, these programs will need to ensure compliance to maintain a “safe, orderly, and regular flow" as envisaged in the UN Sustainable Development Goals. They will also need strong regulation by both government and industry groups to avoid a “race to the bottom,” driving down the wages and conditions of native workers. And they will need to be closely monitored so that migrants aren’t exploited or abused as they can be in the Gulf.

It is not impossible to juggle these imperatives. Many countries, such as Australia with its Pacific Labour Scheme, are now proving that it is feasible to set up temporary programs that create opportunities for the world’s poor and respect their rights, while addressing the needs of the labor market in aging countries. Right-wing populists may inveigh against immigrants and warn of immense cultural change, but they cannot ignore the numbers. The arrival of millions more migrants to the wealthy economies of the world will make some uncomfortable and fearful, but the alternative—the disintegration of the social contract that safeguards the elderly—is far more dangerous.