Why Immigration Can’t Save Social Security
Tuesday, April 13, 2010
The logic of saving Social Security through immigration, which makes sense at first glance, falls apart when you inspect the details.
In a new article for the Christian Science Monitor, former Labor Secretary Robert Reich argues that higher immigration could help save Social Security and Medicare. This is an increasingly familiar argument advanced by Reich and others. And on its face this makes sense: if these programs face insolvency because the population is aging, then importing more young people can help fix the problem.
But this argument is wrong. (Moreover, Reich should know it’s wrong, since when we shared a panel on a recent television program he made the claim and I explained why it falls short.)
Since the trust fund return is around 3 percent, typical immigrants received more in benefits than they paid in taxes.
Here’s the problem explained in a little greater detail, using two charts from an article in the International Migration Review by my former Social Security Administration colleagues Howard Iams and Lee Cohen (I should note that while I’m using their charts, I have no idea of their position on the issue).
Iams and Cohen discuss the characteristics of immigrants over the past few decades and how they’ve been treated by the Social Security program. While they touch on a number of issues, I will focus on the rates of return received by immigrants relative to native-born individuals.
The first chart looks at nonimmigrant Americans born in the late Baby Boom years. The vertical axis in the chart represents the percentage of the population, while the horizontal axis represents the rate of return paid by Social Security. The bars show the percentage of native-born individuals receiving a given rate of return. The median rate of return for this group was slightly less than 2.9 percent. Since the program’s trust fund generates an interest rate of around 3 percent, these folks were about neutral with regard to the system’s financing—they paid taxes about equal to the benefits they received. Some received higher returns and others received lower ones, based on their earnings levels, longevity, and other factors, but you have a fairly typical “bell curve” distribution of returns.
The second chart focuses on immigrants born in the late Baby Boom who arrived in the United States after 1969. Most immigrants do pretty well from Social Security since they have low incomes (so that they benefit from the system’s progressivity) and shorter working careers (so they pay fewer taxes). The median rate of return for this group was 3.4 percent. Since the trust fund return is around 3 percent, immigrants typically received more in benefits than they paid in taxes. It’s hard to premise a financial rescue of entitlements programs on having more participants who pay less than they receive.
But it’s the distribution of rates of return that’s even more telling. There’s a fairly normal bell curve distribution centered at a 4 or 5 percent return. The most interesting group is the almost 10 percent of the immigrant population who receive a 100 percent negative return: these folks pay taxes into Social Security but receive no benefits in return.
Who are these people? Most of them will be illegal immigrants, who pay Social Security taxes but are prohibited from receiving benefits. They’re good for Social Security’s finances, as well as for Medicare’s, simply because they pay but don’t receive. This may surprise some folks who think illegal immigration is harming Social Security, but it just isn’t true.
Comprehensive immigration reform would likely increase the flow of legal immigrants into the country. Since these folks pay less in taxes than they receive in benefits, it’s hard to call this a win for solvency.
So you really have two distinct groups of immigrants: illegal immigrants, who pay more in taxes than they receive in benefits, and legal immigrants, who pay less in taxes than they receive in benefits.
Now think what comprehensive immigration reform usually entails: first, immigrants in the country illegally would generally receive some form of legalization—call it amnesty, a path to citizenship, whatever. So a large group of immigrants, who under current law would not receive benefits, now would receive benefits. Good for them, not so good for Social Security’s finances. Second, reform would likely increase the flow of legal immigrants into the country. Since these folks pay less in taxes than they receive in benefits, it’s hard to call this a win for solvency either.
The logic of saving Social Security through immigration, which makes sense at first glance, falls apart when you look at the details.
Andrew G. Biggs is a resident scholar at the American Enterprise Institute. From 2008 to 2009 he served as principal deputy commissioner of the Social Security Administration and as secretary of the Social Security Board of Trustees.
FURTHER READING: Biggs described how the “Obama Budget Rigs Healthcare Numbers,” explained “How Different Is Grandma’s Spending?” and decried “Shooting the Messenger: CBO in the Crosshairs.” He has explained the “Entitlement Apocalypse” and how America can avoid it, and his scholarly work includes a recent dive into “The Market Value of Public-Sector Pension Deficits.”
Image by Rob Green/Bergman Group.