Immigration Reform Can Help Future Solvency of Social Security

August 17, 2010  |   Economics & Trade Paul Crist Politics and Policy

By Paul Crist, August 10, 2010

The bad news is that the fundamental problem faced by Social Security and Medicare in future years is that the decades-long trend of fewer workers supporting increasing numbers of beneficiaries will become critical, potentially threatening the solvency of the system unless some changes are made.

The good news is that there is a simple solution to the worker shortfall.  The bad news is that political posturing, racism and hyper-nationalism is preventing us from adopting that very simple solution.

These programs, despite what we hear about the “Social Security Trust Fund” operate on a pay-as-you-go basis.  The “trust fund,”  while real in certain respects, is more of an accounting figure, based on the excess paid-in contributions from workers and employers to the system that are not required to fund current benefit payments to retirees, survivors, the disabled, and administrative expenses.  The current excess funds are invested in special, non-negotiable government securities held by the trust fund.  If the fund begins to run a deficit, where benefits paid out exceed contributions from workers and employers, the Social Security Administration can redeem the securities to cover the deficit.

At the end of 2008, the trust fund held $2.4 trillion in accumulated government securities.  According to projections, the trust fund will continue to accumulate surplus funds until 2017, when benefits paid out will begin to exceed revenue paid in. That in itself is not an immediate or grave problem, given the large accumulated surplus.  But it does present a problem for government budgeting that partly depends on trust fund purchases of government securities to finance the annual budget deficit.  With the trust fund no longer buying government securities, either the general budget deficit will need to be reduced or it will have to be financed in other ways, such as public borrowing, that are less economically favorable.

By 2037, based on Social Security Administration projections and based on current trajectories of revenue collected and benefits paid out, the trust fund will be completely depleted.  The Congressional Budget Office puts that date at 2052.  These long-term projections on anything are always sort of a “best wild-assed guess…”

These projections have led to claims that Social Security is “unsustainable,” and solutions must be sought.  Benefits could be reduced, extending the life of the trust fund.  Some have said workers should be “allowed” to divert a portion into private investment accounts, thus shifting more responsibility to workers for building their retirement nest egg.  That idea is based on the notion that long-term returns in the private sector (the stock market, for example) exceed the interest paid by the government on debt.  The current economic downturn, however, should make clear that the private sector economy has ups and downs that don’t necessarily match when workers need to retire.  That could put millions of older workers at risk of losing their nest egg just as they reach retirement age.  Some, but not all, may be able to defer retirement.  But with fewer older workers exiting the job market, it also means we need to have stronger jobs growth to accommodate younger workers entering the workforce.

But there is another way to ensure the long term solvency of the Social Security trust fund: More workers to cover the growing number of beneficiaries as Baby Boomers retire. 

As noted, the number of workers per beneficiary is declining.  This trend has been in place for decades.  In 1970, there were 3.7 workers for every person receiving social security benefits.  There are currently 3.2 workers per beneficiary, and by 2020, the number will be 2.6.  By 2040, 2.1 workers will be supporting each beneficiary, meaning that either Social Security payroll taxes will have to be substantially higher (raising the FICA cap on higher incomes might be a good place to look), or benefits to retirees will have to be a bit smaller…some 15% smaller by some predictions.

Those ratios are based on the projected numbers of workers and beneficiaries.  But what if number of workers in the US were to increase at a faster rate than expected?  That should make a big difference.  At current birthrates, the projections don’t look very positive for seniors hoping to avoid old-age poverty thanks to a guaranteed income from Social Security.  But there is another way to raise the number of workers: Immigration.

It may not be politically popular to call for increasing immigration when nearly 10% of American workers are unable to find a job, but it is important to look at the issue with a view to the longer term.

It turns out that Social Security actuarial experts have already studied the effect of immigration on long-term solvency.  And the evidence is clear: Immigration could be a huge benefit to maintaining the program far into the future.

First some current facts that seem to escape media attention:

Of the estimated 12 million undocumented immigrants working in the U.S., 8.8 million, or three quarters, are already paying into the Social Security system.  Their employers more often than not are deducting payroll taxes from their wages and paying the FICA taxes based on Social Security numbers provided, which are false.  In some cases, those undocumented workers are paying into someone else’s account, and those people may benefit from those contributions when they retire. In other cases, the number is simply not a valid, active account, and the funds just accrue to the system.  Social Security administrators estimate that about $9 billion is coming in annually in revenue from undocumented workers.

Because of their legal status, these workers do not add to the program’s cost.  They will not be able to claim benefits later for the contributions made today.  Even if immigration reform provides a path to citizenship, how or whether contributions made prior to legalization are credited remains in question.  A 2006 proposal called for not counting contributions made during illegal residence.  If that occurs, many workers who might gain citizenship will have substantially reduced benefit levels later on in retirement.  Given that these workers are overwhelmingly in lower-wage work, it is unlikely they will have their own retirement savings to rely on.

But increased legal immigration even with full benefits later on, still improves the future solvency of the system by providing more workers per beneficiary.  America now has about 1 million legal immigrants per year.  According to the latest annual report by the Social Security Board of Trustees provided to congress on August 5, 2010, increasing that annual immigration by 285,000 between 2010 and 2034 would reduce the program’s shortfall by 26.4%.  And it appears that the more immigrants we allow, the better it looks:  590,000 additional new immigrant workers annually would reduce the shortfall by 58.8%.

Opening the borders to increased legal immigration is of course not by itself the solution to either solving the long term solvency of Social Security or the structural economic challenges the U.S. faces.  We need to make sure that job growth in the right sectors keep pace with the growth and skill set of the workforce.  We need to fundamentally rebalance the economy away from financial services and toward manufacturing.  That will require attention to trade policy, monetary policy and exchange rate management, energy policies, and an effective industrial production policy.  But the data provided by the Social Security administration adds a powerful argument to the call for comprehensive, and economically sound, immigration reform.

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