Economics, Entitlements

Immigration reform strengthens Social Security? Not so fast

Image Credit: Shutterstock

Image Credit: Shutterstock

Over at National Review Online, I write on how the benefits of immigration reform to Social Security may be overstated. My timing was good: since submitting the NRO piece, SSA’s actuaries released a score for the Gang of Eight’s reform legislation, concluding that it would reduce Social Security’s 75-year shortfall by around 8%. The White House today cited that report to declare that “commonsense immigration reform will strengthen Social Security over the long-term.”

But as I point out at NRO, the Social Security Administration’s actuarial model assumes that immigrants have the same earnings and life expectancies as US residents, when in fact immigrants tend to earn less and live longer than natives. This means they’ll pay less into Social Security, receive more generous benefits relative to their contributions (due to Social Security’s progressivity), and collect benefits longer. As a result, immigration won’t help Social Security as much as you’d think.

Over the weekend, I used the Policy Simulation Group’s Social Security microsimulation model to replicate as closely as possible the SSA’s assumptions regarding the number of new immigrants, the reduction in unauthorized immigration, the size of the future beneficiary rolls, and so on. Even out to 2085, I matched them fairly closely.

But the PSG model is different from SSA’s in that it uses immigrant-specific earnings and life expectancies to better catch how much immigrants will pay into Social Security and how much they’ll receive back. Using the PSG model, immigration reform cuts Social Security’s long-term deficit not by 8% but by less than 1%. It’s basically a wash. And as I point out at NRO, if immigration isn’t helping Social Security it’s downhill from there, budget-wise.

I’m sure I haven’t matched SSA’s assumptions perfectly — there are so many embedded in a simulation that it’s impossible to know. And the PSG model surely has shortcomings as well: modeling Social Security and immigration is really tricky. Yet when I tell the PSG model not to model immigrants’ earnings and life expectancies accurately — that is, when I introduce a deliberate error to the calculations — I generate results that aren’t far off SSA’s score. That tells me that members of Congress need to get answers to detailed questions about what is being modeled and what assumptions are being made — and before, not after, they vote on reform. Modeling immigration reform may not be rocket science, but it’s close enough to it that mistakes can really matter.

7 thoughts on “Immigration reform strengthens Social Security? Not so fast

  1. Interesting point, but aren’t you assuming that the mix of immigrants under the G8 proposal remains the same? That is, if we assume that the current mix is more low-skilled (earning less) and lives longer, if the mix remains the same then it is certainly possible that the G8 bill will result in a negative impact on SS.

    However, it also seems reasonable to think that the mix of immigrants may change – under the points system, it is likely to shift to more high-skilled (higher-earning) immigration.

    On another note, I find it odd that immigrants tend to be both lower-earning and longer-lived. A bit odd given everything we know about the (positive) relationships between income and health, no?

  2. YF, you’re right and that’s a valid point (although I’m pretty sure SSA makes the same assumptions as I do). But my understanding from background reading has been that the skills mix of immigrants probably won’t change much overall. CBO’s recent score doesn’t specify what their assumed mix is, although they clearly have one as a background assumption in generating a variety of numbers for the score. But that’s something I’m going to look into further.

    • I think you’re right; but the CBO report isn’t very transparent in its assumptions, which is unfortunate. Hopefully if they do an update as the House looks at reform they’ll be clearer.

  3. Just one note: Some of the migrants remigrate and never claim their social security benefits. Wouldn’t this return migration (which is higher for high skilled immigrants) cover the extra years for those migrant who stay?

    • I believe that return migration is actually highest for low-skilled employees — many come to the U.S. and return within a very short period. A 1998 paper by Gustman and Steinmeier estimated that around 5 percent of Social Security revenues come from workers who re-emigrate and don’t collect benefits. So it does improve the financing, but not by an enormous amount.

      • To my memory the return migration was rather high right before retirement along with the first 5 years that you mention (though I am not very certain if this was a European data only or also verified for the US). My point was that perhaps 5 per cent of the revenues (as you mention) might be significant enough (given you discuss 8 versus 1 per cent of the deficit) factor, and might be important missing element in the model discussed above. And thank you for your reply!

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