Immigrants can keep Social Security alive

Politicians, media outlets, and the administrative apparatus itself, warn that Social Security is in danger. In as few as 12 or 13 years, Social Security is projected to be insolvent. By 2035, according to government research, the Social Security Trust Fund will only pay 75% of current benefits. This is because the number of dependents continues to outpace the number of contributors. There are simply more people taking from the fund and fewer paying in.

Yet even with these reports, people misunderstand the extent of challenges facing Social Security. 

People are right to worry that the Social Security funds are expected to be zero by 2035. But that is only the start of the problem. Even in a world where the accounts are full, someone will need to produce the goods and services that those drawing on Social Security want. In an aging country and world, this is a serious challenge. 

There’s a solution to both these concerns: immigration reform. Immigrants pay more into the system than they take out. In fact, research shows that creating a pathway to citizenship for undocumented immigrants would both increase tax revenues and make the US more productive.

Why an aging and stagnating population matters for Social Security

Social Security is designed like a Ponzi scheme. In order for it to continue working, more people will have to contribute than are taking out. Population growth is essential to the program. As population growth slows and our aging population continues to retire, the program’s ability to pay erodes.

According to the US Census Bureau, the reasons for the decline include a drop-off in birth rates, lower immigration to the US, and COVID-19. Of these three causes for demographic decline, policy can impact immigration the most. 

Social Security’s future faces twin problems. The first is the “draining savings account challenge,” and the second is the “too few trains” challenge. If we want to keep Social Security solvent and effective for those who rely on it, then we must increase immigration or reduce benefits. 

Social Security’s draining savings account challenge

Think of the Social Security Trust Fund like your savings account. You pay your expenses each month and save the rest for your future. If you’re overspending a lot, then you drain your savings account. Right now, Social Security is the person emptying their savings account to pay the bills. Rather than a job, however, Social Security collects funds through payroll taxes. And rather than a savings account, Social Security has the Social Security Trust Fund. Surplus dollars are invested and collect interest. 

However, the Trust Fund is being depleted and not much is being invested. The Social Security Administration predicts that the fund is expected to be exhausted in just 12 years, by 2035. Without major changes to the structure of Social Security, payroll taxes will be the sole financing for benefits. This revenue will not cover the costs of the program and benefits will then decrease. 

Social Security’s savings account is being drained faster than it is being filled. Demographic changes will accelerate this process. The 2020 Census revealed that the US is growing at the slowest rate “since [the] founding of the nation.” The Brookings Institution’s demographer, William Frey, called this unprecedented. To understand Frey’s point, you need only look at the age dependency ratio today relative to even just 2000. In 2000 there were about 18.5 people 65 and older per 100 working age people in the US. Today there are 25.6. That’s an increase of nearly 40 percent. Because the US is getting older, this increase is just the beginning of the trend.

This is only the first challenge it faces in the coming years. The next may be even more fundamental.

Social Security’s too few trains challenge

Unlike your savings account and budgetary struggles to make ends meet, the government has a massive advantage: They can always print more money. But printing money isn’t a cure-all by itself. This is why, in 2005, then Federal Reserve Chairman Alan Greenspan told lawmakers that it isn’t enough to put money in the Social Security savings account:

There’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is: How do you set up a system which ensures that real assets are created which those benefits are employed to purchase? 

It’s not enough to have cash if you can’t purchase anything. Without enough products on the market, future Social Security benefits will be worthless, even if the dollar amount doesn’t change. If the underlying scarcity remains, prices will be bid up and some people will go without.

Stephanie Kelton and Randall Wray, two economists who study benefit programs like Social Security, analogize this to a city that provides train rides to retirees. Imagine that your local transit agency provided a retirement benefit of 50 tokens each month for life. You hop on the train and hand over a token when you need a ride. There’s no reason for your transit agency to save tokens to give people in the future because it can always make more tokens to hand out. 

But tokens are not train rides. Issuing tokens and ensuring sufficient train rides are not the same problem. The transit agency has to make sure that there are enough trains running and operators working so that no one has to wait too long. 

Having enough tokens is not sufficient if there aren’t enough trains for everybody that wants a ride. In the same way, making sure the government can pay out Social Security benefits and ensuring those benefits have sufficient purchasing power are not the same problem.

Kelton and Wray write, in the language of economics, “Whether future consumption needs are realized will depend solely on society's ability to produce real goods and services (including subway rides) at the time that they will be needed.” You can’t do this without a robust working-age population. 

To fix the problems we face, it is not enough to just put more into the Social Security Trust Fund. We also need to ensure there are workers to provide the goods and services that beneficiaries want to purchase. This means that Social Security’s future struggles are larger than most people realize. In both cases, however, providing a pathway to citizenship for undocumented immigrants is a promising option. 

A pathway to citizenship solves both challenges

Immigrants are not free, but research shows that they do produce a net-win on fiscal balance sheets for the federal government. Even illegal immigrants already pay taxes. Those who present false documents or use an Individual Tax Identification Number (ITIN) rather than a Social Security number pay into Social Security through payroll taxes (but are unable to ever make withdrawals). According to the Social Security Administration, unauthorized immigrants contributed around $13 billion in payroll taxes to Social Security in 2010, while only receiving $1 billion in benefits. 

But would providing a pathway to citizenship make immigrants a net loss for the US? Citizenship would make them eligible for more welfare programs. Quantitative studies don’t bear this worry out. Citizenship increases payroll tax revenues or otherwise makes immigrants more productive such that they continue to pay more into the system than they take out.  

Analysts on both sides of the political spectrum agree that immigration reform creates more financial gains than losses. According to an analysis from the left-leaning Center for American Progress, a reform that grants 60% of illegal immigrants a path to citizenship would create a net contribution of $486.2 billion over the next 36 years. Reform that grants that same opportunity to 85% of illegal immigrants raises that net contribution to $606.4 billion. 

From a more right-leaning perspective, the American Enterprise Institute (AEI) has come to the same conclusion. Marc Thiessen, a senior fellow at AEI writes, “We need immigrants to work and pay taxes that fund Social Security and Medicare for our aging population.” 

Academic research also supports this claim. Using an economic model that distinguishes people who are working from retirees, Joël Machado shows that the benefits of a legalization scheme are likely to outweigh the costs. Retirees benefit most of all—because immigrants increase the size of the working population and support programs like Social Security. 

There are a myriad of differences between the economic behavior of immigrants and native-born citizens, such as differences in saving, how much they contribute to government programs, and how many public resources they consume. Even when considering these behavioral differences, wage effects, and remittances, research shows that offering a pathway to citizenship for undocumented immigrants offers fiscal benefits, while a policy of deportation imposes costs.

The evidence is clear that creating a pathway to citizenship and increasing immigration would be a net contribution to Social Security. This makes it a promising option for policymakers worried about the program’s solvency over the next decade. However, paying into Social Security is only one part of the challenges posed by the demographic changes in the US. As the population ages, there will be fewer people to provide goods and services. The labor shortage may only get worse. Fortunately, the economic benefits of immigration include more than accounting balances. Immigration can provide the workers who will help comprise the workforce to serve the needs of Americans.

We can allow undocumented immigrants contribute more to the economy

To create a healthy economy, the US needs to do more than balance its books. It also needs to ensure that there are people to actually make the cars, meals, and other products that people will want. We will need workers to care for the aging population and provide other services for people of every age. If we neglect this aspect of the Social Security crisis, Social Security checks will have diminished purchasing power and retirees will have decreased living standards.

The healthcare industry is an example of just how difficult demographic declines can be to manage. That’s because it gets hit on both sides. On the one hand, its workers are aging, retiring, and leaving the labor market. So there are fewer people to work in the field. But the other hand comes down on healthcare too—older people need more healthcare services and products. Yet as the labor force shrinks, who will meet those needs?

One option is to encourage Americans to have more children. But, generally, fertility can only be increased on the margins. Government efforts to increase the total fertility rate have had occasional success, but have not adequately increased fertility to completely offset this problem. Note the central problem as well: It takes 18 years to grow an adult. To then train that adult to work in a specific field, especially healthcare, will take even longer. For Social Security to remain solvent, we have just a bit longer than a decade. And the effects of aging are being felt today.

A pathway to citizenship helps spur economic growth. This is the most effective way to ensure that future retirees have access to quality goods, services, and infrastructure. For example, research shows that previous pathways improved the productivity of workers in manufacturing. This is because undocumented immigrants are subject to removal. They’re more likely to keep their heads down than to ask for promotions or seek better positions—they get locked-in wherever they land. A citizenship pathway makes it possible for them to find better work, or even to pursue training programs.

Another way for the immigrants that are already here to be able to better support our economy is to start recognizing foreign credentials. Skilled immigrants are at a disadvantage, especially in industries like healthcare that have strict licensing requirements. They are 34% less likely to hold an occupational license to work in a trade like plumbing or as an electrician or healthcare worker—even if they have relevant training and experience. This would directly help with the healthcare challenge laid out earlier.

Many states are making smart reforms here, but the future will require doing more to open licensed trades to immigrants. Undocumented immigrants are currently excluded from such programs. A pathway to citizenship is one way we can expand the reach of these opportunities. 

It is also estimated that there are 1.7 million undocumented immigrants in the US that are highly educated, 41 percent of which have advanced degrees. Among these individuals, housekeeping is the sixth most common occupation. Getting these highly educated immigrants into positions where they can utilize their advanced training will pay off in terms of increased productivity.

On December 14, Jerome Powell, Chairman of the Federal Reserve, said, "Our labor force should be three and a half million more than it is." Creating a pathway to citizenship for undocumented immigrants is a straightforward solution. Looking to the future, both near and far, it is essential that we unlock the potential of immigrants to help staff our hospitals and nursing homes, grow our food, rebuild our infrastructure, and everything else that will need to be done.

On immigration, we’re better together

The US faces a lot of challenges that are tied to its slowing population growth. But it’s in the enviable position of being a team that people across the world want to play for. We can’t fix our demographic challenge with immigration alone. Still, expanded immigration can keep Social Security solvent and make that challenge easier to manage.

Policymakers interested in providing for America’s future over the coming decades should view immigration reforms that provide a way for undocumented immigrants to earn citizenship and expand immigration as powerful tools. Though immigration is often a partisan area, there is a bipartisan agreement among think tanks and evidence from the academic world that immigration makes the country stronger.