Economics, Entitlements

Immigration, Social Security, and the budget

Image Credit: Shutterstock

Image Credit: Shutterstock

Today, the Wall Street Journal argued in favor of higher immigration, citing an American Action Forum study that reform will generate “a multitrillion-dollar gain in long-term U.S. economic output, higher per capita income growth, and lower budget deficits.” I’ll focus here on one aspect of the budget: Social Security and entitlements, since they’re the place where the case for higher immigration seems strongest.

If you look at the annual Social Security Trustees report, it appears that higher immigration would have a positive impact on Social Security’s finances. Shifting from the Trustees’ baseline annual immigration rate of around 1.1 million to a higher rate of 1.4 million would reduce the program’s annual cash deficits 75 years out by around 8%. That’s about half as large an effect as from adopting the chained CPI. And I expect results for Medicare would be even smaller.

But even this may be overstated. Social Security’s actuaries assume that immigrants and their kids have the same earnings as native-born Americans. (They simply plug more people into the model.) I suspect that the American Action Forum study does the same. In reality, immigrants have below-average earnings and shorter work lives. And, as Jason Richwine has shown for Hispanic immigrants, their kids and even their grandkids have lower earnings as well. Since Social Security is progressive, a low earner receives more in benefits than he pays in taxes. That will be the case for Medicare as well and most likely in terms of the trade-off between income tax revenues and means-tested welfare programs.

I suspect that the AAF’s claim of higher per capita income rests on first, the mistaken assumption that immigrants have the same earnings as native-born, and second, the fact that the “per capita” includes retirees. I’m pretty confident that, in reality, output per worker and average wages would fall. It doesn’t matter, as Shika Dalmia says, that immigrants consume fewer welfare benefits than native-born with similar incomes. It does matter that, on average, you’re making the population poorer and poor people on average pay less in taxes than they receive back from the government.

So could immigration help entitlements and the budget? Sure, if it was principally high-skill, high-earning immigration. But is that the deal on offer? No.

One thought on “Immigration, Social Security, and the budget

  1. re: “If you look at the annual Social Security Trustees report”

    I’d suggest being skeptical of the trustees report. It turns out that even aside from the recent critique of its demographics assumptions printed in an NYT oped, there are other major problems with the forecast that are easy to spot with a critical examination of it (for instance their “high cost” scenario is high cost in nominal dollars, but turns into the *low cost* scenario if you adjust for inflation, which is a clue to some oddities in it). Historically they have a history of both being off the mark but more importantly overconfident in the accuracy of their estimates, e.g. this page notes:
    “The 1950 annual SSA report projected US population in 2000 to be worst case 199 million, best case 173 million. In reality it turned out to be 282 million, 42% above their highest projection. Imagine if their real costs turn out to be 42% higher than their current projections”

    It goes on to explore other problems with the forecasts in gory detail.

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