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Will the wall crush Social Security too?

March 1, 2017

 

When one of our reader-contributors told me that Volume 1 missed the most important part of the Social Security Administration Trust Fund report, it took me a only a few seconds to know what he meant.

 

When projecting the solvency of Social Security, the Trustees have to make economic and demographic assumptions about the future. They make three sets of assumptions: a neutral scenario, a positive scenario and a negative scenario. When you look at the OASDI report, which you should, you must consider the assumptions to see how likely you think each of the three cases is.

 

Most of the assumptions are with respect to variables that we have very little to control from a policy perspective. For example, no matter what you think about the ACA or family and medical leave policies, over a 75-year period the government will have only a small impact on fertility and mortality rates. Productivity, unemployment, GDP and interest rates - the government may have an effect in the short-term, but over 75 years it is hard to move the needle. There is, however, one area where government policy will have a big impact: immigration.

 

There are reasons to be in favor of immigration, against immigration, in favor of some against others and so forth. I'm going to ignore the moral, ethic, national security, religious and other arguments about immigration; this is only about Social Security.

 

Immigration - in and out, legal and illegal - is a key input to the demographic model used by the Social Security Administration. This is because immigrants are structurally unlike natural-born residents in how they affect the system. Temporary immigrants will (in general) pay withholding taxes, but will return to their country before receiving benefits. Undocumented immigrants, similarly, pay in to the system but are very likely to ever receive benefits. Workers in these categories are therefore very beneficial to the solvency of Social Security. Here are the Trustees projections for 75-year average net immigration (i.e. subtracting departures) for each of their scenarios:

 

 

The Trustees' best estimate of net immigration for 2016 is 1,579,000, so the neutral scenario already assumes a significant decrease. We know the three scenarios lead to very different outcomes; can we tell how much of this is due to the immigration effect (as opposed to the many other variables)?

 

Short answer: maybe. The Trustees don't run their model for different levels of immigration, keeping other variables constant. And with the new administration...well I don't expect them to emphasize this effect. However, there is some data out there that allows us to guess.

 

The Daily Beast put out a good article in 2014, in the context of fiscal benefits from a possible legalization of 5 million current undocumented immigrants. To quote the article:

 

"Here’s how the math works. Five percent of the U.S. work force is undocumented, which is some 8.1 million people. Thirty-eight percent of the 8.1 million pay social security taxes, which comes to roughly $12 billion a year, according to CAP estimates. That’s a pretty nice cushion for a graying America."

 

This $12 billion per year net contribution is a good portion of Social Security's current actuarial deficit. My back of the envelope calculation is that maintaining this contribution reduces the 75-year shortfall by around 20%. This is a significant amount, equivalent a somewhat painful tax increase / benefit cut. But the article goes on:

 

"Obama’s executive order would allow newly legalized workers to eventually collect benefits when they reach retirement age. But that’s a long way off for many of them, and any potential loss would be more than offset by the millions of young workers who will be brought into the system to pay taxes for three or four decades before they can collect benefits."

 

I'm not able to find any exact numbers of the effect of a "Gang of 8" style immigration bill on Social Security specifically. But the CBO scoring of the Senate-passed (House-rejected) S.744 was that it would reduce net federal debt by $120 billion in the first decade and $700 billion in the second decade. Even if it isn't specific to Social Security, this is a significant improvement in Federal finances.

 

Again, I'm not saying that there are not good reasons to oppose immigration, or want to limit it. But, in the debate, fiscal policy is seldom mentioned. When considering your position, keep in mind that the more immigration we allow, the more likely you are to receive your Social Security.

 

 

 

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