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Here's how immigration is affecting Social Security

The Motley Fool logo The Motley Fool 2/15/2019 Sean Williams

Few, if any, social programs pack a punch for the American public quite like Social Security. This is a program that provides a benefit check to nearly 63 million people each month, 7 out of 10 of whom are retired workers. Of these retirees, 62% lean on their monthly payout to account for at least half of their income. In other words, without Social Security in place, we'd likely be staring down a serious elderly poverty problem.

Social Security's judgment day is rapidly approaching

Then again, it's also a program that's on thin ice. Beginning sometime in the very near future, Social Security is expected to expend more than it collects in revenue for the first time since 1982, the year prior to the Reagan administration passing the last major overhaul of the program.

What could cause such a reversal of fortune for Social Security? Part of the blame, through no fault of their own for simply being born, is that baby boomers are leaving the workforce at a faster rate than new workers can replace them, leading to a decline in the worker-to-beneficiary ratio. Other factors at fault include increased longevity over many decades, growing income inequality, and lower fertility rates.

If there are consolations here for existing and future beneficiaries, it's that the program is in no danger of going belly-up, and it does have almost $2.9 trillion in asset reserves built up since inception. The problem is that these asset reserves can only hold up for so long if Social Security is spending more than it's collecting each year. That's why the latest Trustees report has projected that the entirety of this excess capital will be exhausted 15 years from now, in 2034. Should Congress fail to amend the program in order to generate additional revenue, a sweeping cut to benefits of up to 21% may be needed to sustain payouts through 2092.

Immigration is a net positive for Social Security

However, the factors listed above aren't the only things influencing Social Security. Immigration tends to play a very large role as well. In fact, immigration and its impact on the program might be one of the most misunderstood aspects of Social Security.

When the Trustees release their annual report looking at the short-term (10-year) and long-term (75-year) outlook for Social Security, one of the key factors examined is the immigration rate. Immigration is itself a net positive for the Social Security program. That's because a majority of legal immigrants tend to be younger in age, meaning they're going to be a part of the American workforce for decades before retiring. These immigrating workers, and the payroll tax revenue they'll provide, are very much needed to help support payouts to current and future generations of retirees.

Meanwhile, undocumented immigrants aren't allowed to receive benefits since they have no legal pathway to receiving a Social Security number (SSN). That doesn't stop some undocumented workers from using a fake SSN or a friend's SSN to get a job, ultimately paying billions of dollars into the system annually without any chance to ever collect a red cent in return.

Though the immigration debate is contentious, there's little doubt that immigration is having a positive outcome on Social Security.

Related video: How to max your Social Security payout (provided by Money Talks News)

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Quantifying the impact of immigration on Social Security

The bigger question, I believe, has always been just how much of an impact is immigration having on Social Security, in dollar terms. The Trustees report provides a roundabout answer to that question.

Each year, the Trustees report examines the 25-year, 50-year, and 75-year actuarial balance based on three levels of average annual net immigration. In the 2018 report, these were 952,000 persons, 1,272,000 persons, and 1,607,000 persons. Regardless of the time period (25, 50, or 75 years), the actuarial balance -- i.e., the amount Congress would need to raise the current 12.4% payroll tax rate today to fully cover the projected cash shortfall over a defined number of years (in this case 25, 50, or 75 years) -- decreases as average annual net immigration increases. Over the long run, the report notes that for every 100,000-person net increase in average annual immigration, the long-term actuarial deficit drops by about 0.08%. The opposite is true if net immigration declines over time. 

To put this in an easier-to-understand context, the long-term (75-year) actuarial deficit in 2018 was 2.84%. This means that if the payroll tax were increased from 12.4% to 15.24% (2.84% higher), it would presumably eliminate the $13.2 trillion cash shortfall currently projected between 2034 and 2092. But if, for example, net immigration into the U.S. were doubled to roughly 2.5 million people annually, it would lower the long-term actuarial deficit by about 1%. This would, presumably, lower the program's long-term cash shortfall by trillions of dollars.

In today's dollars, 0.08% of taxable earnings probably doesn't sound like a lot. But for each 100,000-person increase in net immigration, it would result in approximately $5.6 billion in added payroll tax revenue for the program, per year. That's given the assumption that roughly $7.05 trillion in earned income was subject to the payroll tax in 2017, as evidenced by the $873.6 billion in collected payroll tax revenue. That's not chump change, and it's certainly something to keep in mind as the immigration debate rages on.

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