In an editorial entitled “How Immigrants Saved Social Security,” New York Times discusses how changes to modeling of immigration improved the long-term financing projection for Social Security in this year’s Trustees Report. the
Immigration is good for the financial health of Social Security because more workers mean more tax revenue. Illegal immigration, it turns out, is even better than legal immigration. In the fine print of the 2008 annual report on Social Security, released last week, the program’s trustees noted that growing numbers of “other than legal” workers are expected to bolster the program over the coming decades.
One reason is that many undocumented workers pay taxes during their work lives but don’t collect benefits later. Another is that undocumented workers are entering the
For what it’s worth, here’s the mental framework I use to think about immigration and Social Security financing. Roughly, I divide the Social Security program into two parallel systems – one for native born workers and their descendants, and a second for immigrants and their descendants. (Since immigration often marry native-born and have children, this isn’t flawless, but it will work for these purposes.) For immigration to help Social Security financing as a whole, the immigrants’ system has to be more than solvent over the long-term; it has to throw off additional money that can then be used to subsidize the native-born system and thus improve solvency overall.
- Earnings: Since immigrants tend to have lower earnings and shorter work lives (which makes them appear even poorer to the progressive Social Security benefit formula), those who collect retirement benefits will tend to get a good deal. To the degree they receive an internal rate of return (IRR) exceeding the trust fund’s interest rate, these immigrants will receive more in benefits than they pay in taxes, and thus be a drain on the program.
- Likelihood of collecting retirement benefits: As noted in the Trustees Report, many immigrants do not end up collecting retirement benefits. They may be illegal immigrants and thus ineligible to collect; likewise, they might return to their home country and not collect benefits, or fail to work the 10 years necessary to qualify for retirement benefits. These workers are a net gain to the program, since they pay taxes but don’t collect benefits.
- Earnings levels of immigrants who don’t collect benefits: Social Security’s financing benefits from high income immigrants who don’t collect benefits, since these individuals pay more taxes. There is good reason to believe, however, that illegal immigrants and immigrants who return to their home countries will have below-average earnings levels. In part this is because illegal immigrants’ wages tend to below, and in part because those who succeed economically in the
are more likely to remain here. The earnings levels of immigrants of any kind are not, to my knowledge, modeled by SSA’s actuaries; rather, they are treated as having the same average earnings as native-born. This is a weakness in the current model that SSA should aim to address. U.S.
- Fertility of immigrants, legal and illegal: In general, fertility rates for immigrants are higher than those for native-born; this will tend to help long-run system financing. At the same time, fertility for immigrants varies more by education level than it does for native-born. Thus, lower educated (and presumably lower earning) immigrants may have disproportionate numbers of children. To the degree that these children have lower than average earnings, and thus higher than average benefits relative to earnings, the net gain to system financing may be reduced.