- Immigration reform will be a likely cost for the rest of the budget, so it's important to get Social Security right
- Social Security is the only major federal program that could potentially benefit from higher immigration
- Reform is about treating immigrants fairly, enforcing rule of law, and policy that helps those who already live here
- Arguments over the budgetary impact of immigration reform will weigh heavily in congressional deliberations
- Before passing immigration-reform legislation, the House should ensure that it has the full picture
One oft-cited reason to support immigration reform is to help Social Security's finances by introducing young workers into an aging system. Official figures bear out this presumption, but these figures are based on models that assume that legal immigrants are effectively identical to workers already in the U.S. But they are not, and these differences -- particularly with regard to immigrants' earnings and life expectancies -- may reduce or eliminate the benefits of immigration to Social Security. Since immigration reform is likely to be a cost for the rest of the budget, it's important to get the Social Security side right.
Recent analyses of immigration reform from the Social Security Administration and the Congressional Budget Office make reform appear to be a boon to Social Security and the budget as a whole. Indeed, as the Committee for a Responsible Federal Budget has pointed out, the CBO concluded that the entire net budgetary improvement from immigration reform was due to higher revenues collected from Social Security. But these analyses cover at most the next 20 years, a period during which the typical new immigrant -- who is around 30 years old -- will pay taxes but will probably not collect benefits. In following years, of course, the bill comes due, and it's important to know whether the extra revenues generated by immigration reform will be sufficient to cover the extra benefits that must be paid.
In the case of so-called amnesty for unauthorized workers currently living in the U.S., that's unlikely to be the case. The SSA estimates that around half of unauthorized immigrants use a fake or expired Social Security number, contributing around $12 billion per year to Social Security. Because these workers cannot collect benefits, they improve Social Security's finances. Other undocumented workers neither pay taxes nor receive benefits. Legalizing undocumented workers would allow them to participate in Social Security, raising short-term revenues. But even if the wages of unauthorized immigrants rise in response to legalization -- something that current research suggests may not be likely -- the extra benefits paid out will almost surely outweigh the short-term revenue gains. It is difficult to portray legalization of unauthorized workers as anything but a financial loss to Social Security.
The trickier question is how higher rates of future legal immigration affect Social Security. According to the Social Security trustees' report, raising immigration by 150,000 per year - about the long-term level envisioned in the Gang of Eight's proposal - would reduce the program's long-term shortfall by around 4 percent.
But immigration's positive effects could be even smaller, because Social Security does not model many of the ways in which immigrants differ from workers already in the U.S. For instance, legal immigrants have low average earnings. Yet, as a technical panel appointed by the Social Security Advisory Board pointed out, SSA's model assumes that immigrants earn essentially the same wages as do natives. These differences are important, given that Social Security's progressive benefit formula pays low earners higher benefits relative to their earnings and taxes.
Likewise, immigrants tend to live longer than natives do. For instance, a 2001 study by researchers at the National Institute of Health concluded that immigrants have significantly lower mortality rates than U.S.-born individuals, meaning they could potentially collect benefits for a greater number of years. But the SSA model does not seem to account for this either.
The Policy Simulation Group's Social Security microsimulation model, which accounts for both the earnings and the life expectancies of immigrants, estimates that the typical legal immigrant will collect roughly 25 percent more in lifetime benefits than he or she will pay in taxes -- a fact that's important to consider when analyzing the effects of adding millions of principally lower-earning participants to the system in coming decades.
The Congressional Budget Office's Long-Term (CBOLT) model is better at analyzing immigration, since it works on a person-by-person basis and models immigrants' earnings and fertility distinctly from those of natives. However, this approach introduces a potential error with regard to immigrants' lifespans. The CBO model estimates individuals' mortality based on their education, earnings, and marital status. From on these factors, immigrants should have below-average lifespans, by around a year. In reality, though, immigrants live about two years longer than natives do. Thus, the CBO model potentially understates immigrants' lifespans -- and years of benefit receipt -- by up to three years. This won't matter much for their short-term score, since very few immigrants are collecting benefits, but over longer time periods, it could be important.
Does all this mean that immigration reform will hurt Social Security? Not necessarily. Higher future immigration may still have small benefits for Social Security, which would be offset by the costs of legalizing unauthorized immigrants. I have worked with the Policy Simulation Group's Social Security model to estimate the effects of immigration reform after accurately accounting for the earnings and mortality of immigrants; while there's more work to do, at this point it appears that immigration reform is about a wash for Social Security.
But that in itself is important, because Social Security is the only major federal program that could potentially benefit from higher immigration. Medicare very likely would suffer financially from higher immigration, since its tax and benefit structure is significantly more progressive than Social Security's. Immigrants' use of means-tested social programs, even if limited, would cost the federal budget, because these programs are funded by income taxes that fall principally on very high earners.
Immigration reform is about much, much more than entitlements or the federal budget. It is about treating immigrants fairly, it is about enforcing the rule of law, and it is about designing an immigration policy that helps rather than hurts those who already live here, in particular the low earners whose economic prospects have suffered so much in recent decades.
Yet, as we have already seen, arguments over the budgetary impact of immigration reform will weigh heavily in congressional deliberations over the present legislation. Before passing immigration-reform legislation, the House should ensure that it has the full picture -- meaning, it should look at Social Security and Medicare over the long time periods that truly matter, and ensure that these long-term scores accurately account for the many ways in which immigrants differ from current U.S. residents. False precision should not be taken as a guide to policies that have far-reaching ramifications for the budget and the country.
Andrew G. Biggs is a resident scholar at the American Enterprise Institute and former principal deputy commissioner of Social Security.