Benefits of immigration

The greatest economic benefit from immigration is not just filling the skills-shortage gap but overcoming longevity risk. Longevity risk is the risk that insured population lives longer than forecasted and hence the funds to pay the benefits like annuities of pension and welfare will be significantly greater than already reserved by the State, by employers and by insurance companies. More and more people in developed countries are now getting older and the birth rate is not high enough to compensate for that. The result is double crunch on the working population as it has to both support more elders and face no suitable replacements when it will be their time to retire.

This pension crisis is what is undoubtedly the biggest economic spectre haunting the developed countries. According to CitiBank, the pension deficit for 20 OECD countries stands at a staggering USD 78 trillion.

Even Nobel laureate Bill Sharpe talked about his interest in retirement research, particularly the decumulation phase for individual investors, said, “It’s a really hard problem — the hardest problem I’ve ever considered because it’s multidimensional.” regarding retirement funding deficit.

The refugees coming both legally and illegally are mostly young and influx of more and more young people will mean that this problem of longevity will be reduced substantially. When comparing UK to Canada and Australia, Canada and Australia are better equipped to meet the financial needs of their retirees largely due to higher immigration than UK. Higher immigration also tends to bring in more income tax without increasing tax rates by the government.

 

Determinants of immigration success or failure

Recent experience and difference in level of success in immigration can highlight some levers that determine whether immigration can have a positive impact on the host society or not. The factors discussed here are:

• How the sponsoring country assimilates the immigrants
• Time scale of immigration
• Current political and social trends

It does depend how the sponsoring country assimilates these immigrants and refugees. France has a huge Muslim migrant population from North Africa former colonies but they are largely ‘underclass’ and estranged Muslim population who are stuck in perpetual poverty and crime. If people become underclass than they no longer reduce the longevity risk. In fact, they only increase resentments and chances of terrorism and crime. Zeeshan Ul-Hassan Usmani performed data science analysis on European social media profiles and concluded that France has the largest population that is ‘ready to radicalize’. ‘Ready to radicalize’ are mostly young, males, middle class, feel they have lost their roots, and are not from religious Islamic backgrounds. Canada has assimilated the immigrants better than France and so it possibly has relatively lower longevity risk and lower terrorism instances.

Second element is time scale which is sudden or gradual immigration; refugees are sudden massive influx over a short span of time and can saturate the countries and create a host of problems as this short time does not leave room for effective policy making, cultural assimilation and gradual increase in infrastructure to accommodate the refugees. Syrian refugee crises are facing this problem world-wide. Gradual policy-oriented immigration like in Canada and Australia means that there is more breathing space to systematically assimilate immigrants so that their benefits can be realized.

The third factor is the current political and social trends. Despite the benefits of immigration, we have to view immigration in its proper social risk context. We are living in times of polarization brought about by decades of economic inequality, financial crises, wars and unemployment due to automation from technology. Now with Trump and increasing nationalization across the world it seems that after 5 decades of globalization we might be seeing contractions and a wave of anti-globalization. Increasing immigration is hence not a good solution to overcome the retirement crisis currently as the public and policy makers seems to increasingly fear their negative consequences more than they value the positive benefits of immigration.

 

Proposed solution-one suggestion in a universe of possibilities

As mentioned earlier, Retirement crisis in developed countries is the biggest investment crises that is coming closer as time passes. the issue is that more and more people are turning old in developed countries and living longer than before, whereas low birth rates means that the working segment of population and the governments will be under pressure to fund the pensions and retirement benefits that they had promised. Low interest rates, economic crises etc. are only making this deficit worse. So far solutions are 1) increase normal retirement age, 2) make financial derivatives that no one can understand, 3) shared economy, 4) reverse mortgages, 5) increasing child benefits and trying to lower health costs for the elderly and of course the most powerful one 6) immigration. as you can well contemplate, all of these have their limitations.

How can we hit two birds with one stone; a solution that can reduce the pension deficit despite living in anti-globalization and increasing financial inclusion in developing countries?

My idea would be to make a sovereign ‘demography bond’ that will connect young savers in developing counties (like Pakistan where 60%+ of population is young) to old pensioners in the developed countries. Young people will deposit savings that will fund pension of old people in developed countries for gaining returns. this way, inducing immigration and its political costs will be reduced and young people will be encouraged to save and reap returns whereas retirement fund deficit can be lowered. For financial inclusion and reducing inequality, these savings should be on ‘fintech’ basis like on mobiles, flexible and available on micro levels of savings so that large amount of people in developing countries are tapped.

Please note that this is not longevity bond. This sovereign demography bond idea is very different from a longevity bond. To the best of the knowledge and awareness of this author, I have not seen this idea being proposed on notable policy making media outlets and believe that this idea should be given more attention and limelight. It will require a lot of political leverage to connect two countries of contrasting demographic profiles but technology can help us make this a reality now. Allianz Risk Transfer and Nephila have piloted a catastrophe swap which will transaction on blockchain (instead of fiat currencies) and if the world can achieve this high level of innovation that this idea of sovereign bond can also be executed given the willingness.

 

Sources:

Business Insider; David Scutt March 2016: the world is facing a pensions crisis. Available at: http://www.businessinsider.com.au/unless-theres-compromise-the-world-faces-a-pension-disaster-2016-3

Mercer and the CFA Institute; March 2015: An ideal retirement system. Available at: https://www.cfainstitute.org/learning/future/Documents/an_ideal_retirement_system.pdf

LinkedIn Pulse: Paul Sweeting; Feb 2016: How to defuse a demographic time bomb. Available at: https://www.linkedin.com/pulse/how-defuse-demographic-time-bomb-paul-sweeting

CNN Money: Heather Long; Dec 2015; Who’s joining ISIS? It might surprise you…. Available at: http://money.cnn.com/2015/12/15/news/economy/isis-recruit-characteristics/

Press Release on Allianz website: June 15, 2016. Available at: http://www.agcs.allianz.com/about-us/news/blockchain-technology-successfully-piloted-by-allianz-risk-transfer-and-nephila-for-catastrophe-swap-/