Based on the responses of retirees from more than 20 years of annual surveys from national pollster Gallup, Social Security income is indispensable. Between 80% and 90% of then-current retirees said they lean on their monthly Social Security check to cover at least a portion of their expenses.
Ensuring that the foundation of America's top retirement program remains strong for current and future generations of retired workers is paramount. Unfortunately, this 88-year-old program is exhibiting signs of distress, and immigration issues are one of the core reasons why.
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America's top retirement program is facing a long-term funding shortfall of $22.4 trillion
Every year since monthly retired-worker payouts began in 1940, the Social Security Board of Trustees has released a report that examines the program's current balance sheet and forecasts its financial health over the short run (next 10 years) and long term (next 75 years). The trustees take into account a number of factors, including demographics changes, along with shifts in fiscal and monetary policy, when issuing their forecast on Social Security's financial outlook.
Since 1985, the Trustees Report has cautioned that America's leading retirement program can't meet its long-term funding obligations. In plainer English, the projected revenue collection in the 75 years following the release of a report won't be sufficient, including cost-of-living adjustments, to cover benefit outlays and administrative expenses. As of the 2023 Trustees Report, Social Security is facing a $22.4 trillion (and growing) unfunded obligation shortfall.
The more immediate issue is the asset reserves for the Old-Age and Survivors Insurance (OASI) Trust Fund. This is the fund responsible for dishing out benefits to 50 million retired workers and roughly 5.8 million survivor beneficiaries each month. If the OASI's excess cash built up since inception were to be depleted by 2033, as currently forecast, sweeping benefit cuts of up to 23% may be necessary to sustain payouts through 2097 without the need for any further cuts.
Put another way, Social Security is in no danger of going bankrupt, or becoming insolvent and disappearing. But it may not be able to sustain its existing payout schedule as soon as nine years from now.
The bulk of Social Security's growing cash shortfall can be traced to ongoing demographic shifts. Some of these are well known, such as the retirement of baby boomers and increased longevity since Social Security payouts began more than eight decades ago. Others are perhaps less obvious, such as growing income inequality and historically low birth rates.
But the one demographic shift that's causing all sorts of problems for Social Security has to do with the rate of immigration into the United States.
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Social Security's immigration problem has been worsening for 25 years
Peruse social media message boards and you'll undoubtedly find some very heated and contentious discussion of the role immigration appears to be playing on our nation's top retirement program.
In particular, there's the belief that undocumented workers are a strain on Social Security and one of the root causes of the program's growing funding obligation shortfall. However, this thesis couldn't be further from the truth.
Social Security is a program that's heavily reliant on people legally migrating into the U.S. each year. Most people who move to the U.S. tend to be younger, which means they'll spend decades in the labor force. Social Security collects approximately 90% of its annual revenue from the 12.4% payroll tax on wages and salaries (up to $168,600 in 2024).
The dilemma for Social Security is that net migration into the U.S. peaked a quarter of a century ago and has been precipitously declining every year since then. According to data from the United Nations, the net migration rate for the U.S. per 1,000 people has fallen from 6.48 in 1998 to 2.748 in 2023, representing a nearly 58% drop in legal net immigration.
With the U.S. population reaching nearly 340 million in 2023, a net migration rate of 2.748 per 1,000 people translates to roughly 934,300 net legal migrants entering the United States. The 2023 Trustees Report bases its $22.4 trillion funding shortfall estimate on average annual net immigration of 1.245 million people through 2097. In other words, a continued decline in the legal net migration rate will almost certainly result in a larger expected funding obligation shortfall over the coming 75 years.
Immigration is a net positive for the traditional Social Security program
Interestingly enough, legal immigration isn't the only thing that provides a net benefit to the traditional Social Security program, which includes payments made by the Social Security Administration (SSA) to retired workers, workers with disabilities, and survivor beneficiaries.
One of the most common issues with immigration discussions surrounding Social Security is that the traditional Social Security program and Supplemental Security Income (SSI) are conflated.
Although both programs are overseen by the SSA, they have very different funding sources. Whereas traditional Social Security is funded through a combination of payroll taxation, the taxation of benefits, and interest income earned on the program's asset reserves, SSI is funded via the General Fund.
SSI also, on occasion, provides income to people seeking asylum in the United States. Traditional Social Security provides no benefits whatsoever to undocumented workers.
Here's what's interesting: According to an analysis from New American Economy in 2016, undocumented workers contributed an aggregate of $100 billion in payroll tax to the traditional Social Security program over the previous decade. While undocumented workers don't qualify for any payments or benefits, they're accounting for a little more than 1% of the annual revenue collected by traditional Social Security.
Looking at this from a purely financial perspective, undocumented workers are helping, not hurting, the traditional Social Security program.
More importantly, if legal net migration into the U.S. doesn't reverse course soon, Social Security's already large funding obligation shortfall is going to worsen.
