Comprehensive immigration reform legislation has moved through the Senate committee process and is about to be considered on the Senate floor. The legislation has potentially significant effects on how many people pay US taxes and receive federal benefits, which inevitably prompts questions about its ultimate effects upon federal finances. A battle of numbers has broken out, with the legislation’s advocates advertising anticipated favorable effects and its opponents alleging unfavorable ones.
Because of my position as a Social Security trustee, I am occasionally asked to describe the effects immigration reform will have on program finances. My short answer is probably an unsatisfying one: basically, it depends. This primer walks through some of the variables that will affect the results.
Point #1: The projected effects of immigration reform on Social Security depend on one’s initial assumptions about how reform will affect net immigration levels. This might seem like an obvious point but it’s very important. The Social Security trustees are set up to analyze Social Security finances but not every other aspect of federal law that might affect them. We are not immigration policy experts any more than we are income tax policy experts or farm program experts. If we are handed a specific set of assumptions about what immigration reform will do to immigration levels, the SSA actuary’s office can translate that into an estimate of effects on program financing. But the results will be driven by those starting assumptions about immigration levels, which in turn rely heavily on what immigration experts tell us will happen. Any such findings should thus be interpreted as a projection of Social Security financing effects assuming certain changes to immigration levels arise from legislation.
Point #2: All other things being equal, more immigration is generally good for Social Security finances. A caveat should be issued with this statement; the measured improvement in Social Security finances is mostly real; a small piece of the apparent improvement is illusory.
The “real” reasons that more immigration is good for Social Security are various, but many of them are rooted in immigration’s improving the program’s ratio of taxpaying workers to recipient beneficiaries. The immigrants themselves embody more workers paying Social Security payroll taxes, and if they also contribute positively to US fertility rates and thus to the stock of future taxpaying workers, so much the better.
Also important here is that under current tax and benefit schedules, those now entering the Social Security system are projected to contribute more in taxes than they will receive in benefits (in present value). This is true even though the Social Security system faces an overall excess of scheduled benefits over projected taxes; that imbalance exists, however, because of obligations to those already in the system.
It’s actually highly likely that the positive contribution made by those now entering the Social Security system as workers will be substantially greater than now projected. This is because it’s unlikely that the current Social Security shortfall will be corrected by cutting benefits for current recipients. More likely, younger workers will wind up paying even more in taxes and receiving less in benefits than now scheduled. If current beneficiaries are held completely harmless in a solvency solution, the subsidy provided by young workers to Social Security could equal as much as 4% of their lifetime wages.
These facts actually underlie an important and much underappreciated point: workers now entering the Social Security system will bolster its finances somewhat as things stand now, but they will improve it substantially more if we enact comprehensive Social Security reforms that align its tax and benefit schedules.
On the other hand, a small piece of immigration’s apparently positive contribution to Social Security finances is illusory. This is because immigrants will generally pay taxes into Social Security first before later receiving benefits from it. Both the higher taxes and the higher payments are financially significant, but current Social Security accounting methods miss some of the latter. For example, if we measure out for only 10 years, we’ll see some immigrants’ tax contributions but not the additional benefits obligated to them, thereby exaggerating our estimate of their positive contribution. The further out we look, the more this illusion fades but it never goes away completely. For example, the trustees’ “higher immigration” scenario published in 2012 shows an improved program actuarial balance of 8.3% in the first 25 years, with the improvement declining to 7.5% over 75 years. More immigration still has a positive effect in the long run, but it gradually becomes less so over time.
Generally though, higher levels of immigration are good for Social Security finances, all other things being equal.
Point #3: Illegal immigration is currently a net plus for Social Security finances. To the extent that reform increases the likelihood that those now illegally present will file for benefits, Social Security finances could worsen. Many do not realize that many of those illegally present in the US already pay Social Security payroll taxes and are theoretically eligible for benefits under current law. SSA estimates that there were roughly 3.1 million “unauthorized immigrants working and paying Social Security taxes in 2010,” contributing roughly $13 billion in Social Security taxes. As SSA also notes, though, “a relatively small portion of those (unauthorized immigrants) who potentially could draw benefits do so.” Reasons include the individuals’ reluctance as well as the practical difficulty of substantiating previous periods of unauthorized work. With total benefit payments to unauthorized immigrants amounting to only $1 billion in 2010, the net result was a net positive financial contribution of $12 billion to Social Security. Basically, millions of unauthorized immigrants now pay payroll taxes into Social Security but for the most part they don’t claim benefits.
If reform made it easier for such individuals to acquire legal status, many of them would continue to pay payroll taxes while claiming benefits in increasing numbers. This would worsen Social Security finances. On the other hand, reform could also increase the tax compliance of now-unauthorized individuals. SSA estimates that 3.9 million such unauthorized immigrants “worked in the underground economy in 2010.” If these individuals newly began both to pay payroll taxes and to claim benefits, the net effect on Social Security would depend on their wage profiles. This phenomenon is explained in the next point.
Point #4: High-wage immigrants bolster Social Security finances; low-wage immigrants weaken them. While as a general rule more immigration is good for Social Security, specific effects depend greatly on the wage profile of the immigrant population. This is because the Social Security benefit formula is progressive; it offers much more generous benefit returns on the contributions of low-wage workers than those of high wage workers. As a result, high-wage workers improve Social Security finances. Low-wage workers embody a net cost, at least in the long run.
Even within this general trend, there are countervailing effects of which to be aware. While high-wage immigrants contribute positively to Social Security by paying in more than they take out, their higher wages also indirectly create some system costs by causing higher benefit payments to be made to others. This is because Social Security benefits are generally indexed to grow with national average wages. To understand this effect, imagine a country with two native-born workers we’ll call A and B. Pretend that they are joined by person C, a high-wage immigrant. C’s arrival causes national average wage levels to rise, and since everyone’s benefits are indexed to national average wages, benefits for persons A and B rise as a result. So while C personally makes a positive contribution to Social Security finances, C also indirectly creates costs by causing higher benefits to be paid to others.
The opposite effect exists for low-wage immigrants. They receive more in Social Security benefits than they pay in taxes, but they also bring the national average wage down and with it the average benefit payment for everyone else. This second effect produces some system savings but in a certain sense it’s the worst of all worlds: low-wage immigrants both pose direct costs to the Social Security system and also cause the Social Security benefits of the native-born population to be slightly smaller. In contrast, high-wage immigrants are a win-win: they contribute more to Social Security than they take out, while their positive contribution to the national wage average causes Social Security benefits for the native-born to be slightly higher.
Point #5: Younger immigrants are better for Social Security finances than older ones. This is true for several reasons. First, younger immigrants will spend more future years as taxpaying workers before they become beneficiaries. Second, because older immigrants have fewer remaining years of earnings and thus lower total remaining earnings, the Social Security system is more likely to perceive older late-career immigrants as low-wage workers and pay them a higher benefit return on their contributions. And third, younger immigrants have more remaining years of potential child-bearing during which they can add further to the ranks of contributing workers.
Considering all factors together in the abstract, I cannot give a reliable answer as to whether immigration reform will improve or worsen Social Security finances. I can, however, say this: if immigration reform leads to increased total immigration by young, fertile workers who ultimately achieve high earnings levels, it will help Social Security finances. If instead it leads primarily to current unauthorized individuals filing new claims for benefits while increasing future immigration of older low-wage workers, it will worsen Social Security finances. To get a better sense of which will happen, one would need to turn to an immigration expert rather than a Social Security expert.
