Immigration reform will improve Social Security’s finances.
The Senate immigration bill has ignited a debate over the fiscal costs of reform, with some conservatives claiming costs far exceed the benefits. We think that’s wrong, and one place to look for evidence is the costliest of all federal programs, Social Security. As some 75 million baby boomers prepare to retire, immigrants will be crucial to keeping the federal pension program afloat.
As too few Americans understand, Social Security is not a pre-funded retirement system and there is no “lock box” with money set aside for each worker’s retirement. It operates as a pay-as-you-go system.
Benefits paid out each year roughly match payroll tax revenues collected, at least until the program goes into annual deficit in a few more years, and the so-called trust fund only contains IOUs that the government owes itself. Those IOUs don’t help. The Social Security Administration estimates that the present discounted value of the 75-year shortfall of promised benefits beyond the taxes expected to be collected is $8.6 trillion.
The crux of the problem is that the ratio of workers to retirees is falling fast. While there were 16 workers for every retiree in 1950, the ratio now stands at a little under 3 to 1 and within 20 years when the baby boomers are age 65 or older the ratio will fall to about 2.5 to 1.
Immigrants help ease this demographic problem in three ways. First, most come here between the ages of 18 and 35, near the start of their working years. Second, few come with elderly parents (only about 2.5% of immigrants are over age 65 when they arrive), and the seniors who do come aren’t eligible for Social Security because they have no U.S. work history. Third, immigrants tend to have more children than do native-born Americans and their offspring will also pay into the system.
These facts are confirmed in the latest report of the Social Security trustees released last week. They conclude that the program’s long-term funding shortfall “decreases with an increase in net immigration because immigration occurs at relatively young ages, thereby increasing the numbers of covered workers earlier than the numbers of beneficiaries.”
How big a bonus are we talking about? Enormous. We asked Stephen Goss, Social Security’s chief actuary, to estimate the value of the 1.08 million net new legal and illegal immigrants that currently come to the U.S. each year. He calculates that over 25 years the trust fund is enriched in today’s dollars by $500 billion and the surplus from immigration mushrooms to $4 trillion over 75 years.
“The numbers get much larger for longer periods,” Mr. Goss explains, “because that is when the additional children born to the immigrants really help.”
The Senate bill raises immigration quotas by about 500,000 a year over the next decade (to reduce backlogs) and by about 150,000 a year after that. Thus the net effect of the immigration bill on the long-range Social Security trust fund “actuarial balance will be positive,” Mr. Goss recently wrote in a letter to Senator Marco Rubio. These higher post-reform levels of immigration would mean an extra $600 billion into the trust fund to about $4.6 trillion over 75 years.
The reason is that most immigrant workers pay into the program for 20 to 40 years before they collect any benefits, and they don’t have parents who collect benefits while they pay in. Once the immigrants retire and collect benefits, their children are making tax payments roughly covering the payments to their parents.
All of this offsets the cost of legalizing currently illegal immigrants. Illegal workers are especially beneficial to Social Security because millions pay into the system—for example, by using fake Social Security numbers when they apply for a job. But since they are illegal, they don’t qualify for benefits when they get old. Legalizing their status means they will qualify for future benefits based on their work from now on, but the fiscal impact of the Senate bill is still positive, says Mr. Goss.
The relative skills and earnings of immigrants and their children also matter a great deal in measuring their financial contributions. More skilled immigrants have higher earnings, so they pay more in payroll taxes. And because of the progressive benefit structure of Social Security, those with higher incomes collect less per dollar paid in.
This underscores an under-appreciated bonus of the Senate immigration bill. The bill shifts U.S. immigration policy somewhat more toward skills-based entry rather than family unification. It also increases green cards for foreigners who graduate from American schools in science and engineering, thus raising the education and skills of new immigrants. This means the future fiscal immigration windfall is likely to exceed $4.6 trillion.
Immigration won’t solve all of Social Security’s financial problems. The program still needs reform in its benefit formula and to allow private accounts. But immigrants unquestionably narrow the funding gap. More generous immigration is a wise step toward solving the entitlement crisis in Washington.
A version of this article appeared June 3, 2013, on page A16 in the U.S. edition of The Wall Street Journal, with the headline: A $4.6 Trillion Opportunity.