Please ensure Javascript is enabled for purposes of website accessibility

Social Security Has an Immigration Problem

By Sean Williams – May 23, 2020 at 6:06AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Hint: It's not the issue you might think it is.

It's time to face the facts: The most-storied social program in U.S. history is in trouble.

Although Social Security has been paying out benefits to retired workers for more than 80 years, and the program is in absolutely no danger of going bankrupt, a number of ongoing demographic changes are threatening to disrupt the amount that the program will eventually be able to pay out. If nothing is done, the latest report from the Social Security Board of Trustees suggests that payout cuts of up to 24% may await retirees by 2035.

A Social Security card wedged between fanned cash bills.

Image source: Getty Images.

What's gone wrong for Social Security?

How, exactly, does the Social Security program go from generating a net cash surplus every year since 1983 to potentially burning through $2.9 trillion in asset reserves over the next 15 years?

Most of the finger-pointing winds up with baby boomers leaving the workforce and taking benefits. There's no denying that a boomer exodus is weighing on the worker-to-beneficiary ratio and putting the Social Security program in a bind. But retiring boomers are far from the only reason Social Security is struggling.

For example, rising levels of income inequality are hurting the program. Well-to-do persons typically don't have financial constraints when it comes to receiving preventative care, seeking medical attention, or purchasing prescription medicines. That's not necessarily the case for lower-income folks, whom Social Security was designed to protect. The result being that wealthier individuals are living significantly longer than low-income Americans, and are therefore receiving a larger Social Security benefit for a longer period of time.

Last week, I examined how historically low birth rates are also a negative for Social Security. Over the past decade, we've witnessed a precipitous decline in U.S. births, with couples waiting longer to get married, gaining easier access to contraceptives, and having noticeably fewer unplanned pregnancies. If these low birth rates persist, there won't be enough new workers to cover those retiring in the years ahead. This, too, will weigh down the worker-to-beneficiary ratio and make it more expensive to fix Social Security.

But there's another significant issue that's not being given nearly enough credit for weakening Social Security's long-term (75-year) outlook: immigration.

A barbed-wire fence in the foreground, with an American flag waving behind it.

Image source: Getty Images.

Setting the record straight: Immigration's impact on Social Security

According to one school of thought, immigration into the United States is a big reason Social Security is struggling. These folks suggest that undocumented immigration into the U.S., and benefits being paid to these noncitizens, are key reasons for Social Security's projected $16.8 trillion cash shortfall between 2035 and 2094.

However, this school of thought would get a failing grade, because it's all wrong.

The Social Security program very much relies on net legal immigration into the United States every year. These migrants tend to be younger, and therefore spend decades in the labor force contributing to the Social Security program via the 12.4% payroll tax on earned income. The payroll tax was responsible for 89% of the $1.06 trillion the program collected in 2019. Without an adequate number of legal migrants entering the U.S. every year, the worker-to-beneficiary ratio would fall even further, widening the amount of money needed to offset the program's unfunded obligations over the next 75 years.

As for undocumented workers, they don't receive traditional Social Security benefits. In order to receive a retired-worker benefit or disability benefit, a person must have earned a requisite number of work credits. Without a Social Security number and/or a legal pathway to citizenship, it disqualifies undocumented migrants from earnings these credits and receiving benefits.

In sum, immigrants are a net positive for the Social Security program.

A Social Security card laid atop a work visa.

Image source: Getty Images.

Here's why net immigration rates should worry future retirees

When the Social Security Board of Trustees releases its annual long-term outlook for the program, it offers three cost models: high, intermediate, and low. The intermediate-cost model is simply the most likely scenario to occur. The reason the Trustees provide the other two models is so observers can understand how much a change in certain variables could impact the program's unfunded obligations in the future.

With regard to net legal immigration rates, the Board of Trustees' intermediate model implies an average annual influx of 1,261,000 people. This leads to an actuarial deficit of 3.21%. The actuarial deficit represents how much the payroll tax would need to go up today in order to offset the cash shortfall between 2035 and 2094, and leave a full year's worth of payouts in asset reserves by 2094.

However, if net immigration falls to 946,000 people per year, as represented in the high-cost model, the actuarial deficit worsens by 26 basis points to 3.47%. Based on the fact that Social Security's long-term unfunded obligations soared $2.9 trillion from the 2019 annual report on a 43-basis-point increase in the actuarial deficit, a 26-basis-point increase would equate to another $1.75 trillion in unfunded obligations.

The reason I mention this high-cost model is because net immigration rates into the U.S. have been steadily falling for the past 20 years. The St. Louis Federal Reserve lists net migration into the U.S. in rolling five-year periods, with the latest period, ended in the first half of 2017, totaling 4,774,029 over a five-year span. That's 954,806 net migrants per year, which lines up almost perfectly with the long-term high-cost model average of 946,000 per year. 

The point being that if the U.S. doesn't find a way to let in more legal migrants on a steady basis, Social Security's unfunded obligations are liable to widen even more. And it's ultimately working Americans who pay for this widening cost.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.