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Summary

Despite oft-heard claims that immigration will bolster Social Security and Medicare, the reality is more complicated. Much of the confusion stems from conflating the impacts of different policies. Toleration of illegal immigration, amnesty for illegal immigrants, and legal immigration are distinct policy choices that require separate analyses. This article explains conceptually how each of these immigration policies would impact the financial health of Social Security and Medicare.

Key points:

This report concludes that immigration is not a practical means of avoiding tax increases and benefit reductions when addressing the future solvency of Social Security and Medicare.

Before discussing the impact of each immigration policy, a few basic points about Social Security and Medicare are in order. First, they have progressive benefit structures. In the case of Social Security, participants contribute the same 12.4 percent tax on all earnings up to the maximum taxable salary, but their benefits increase at a slower rate as their earnings increase. In other words, low earners receive a greater return on their contributions than do high earners.

Importantly, years without work are included as zeroes in the calculation of a workers average earnings. This gives part-career workers a higher-return on their contributions than longer-career workers with the same salary. For example, if a worker earns $100,000 each year for 10 years and then retires, he would pay 50 percent of the taxes paid by a worker who earns $100,000 each year for 20 years. However, the shorter-career worker would receive a Social Security check that is about 58 percent as large.1

Medicare is even more progressive than Social Security because participants need to work for only 10 years at a minimal earnings level to become eligible for the full benefit. In the example above, the shorter-career worker would pay 50 percent of the Medicare taxes as the longer-career worker but would receive 100 percent of the Medicare benefits.

Social Security and Medicare do not establish 401k-style accounts for individual participants. Instead, both programs operate on a pay-as-you-go basis, in which todays workers pay for the benefits of todays retirees. Social Security and Medicare Part A (hospital insurance) are funded with payroll taxes paid into each programs trust fund. All benefits paid by those two programs must flow from their trust funds. By contrast, other Medicare benefits that accompany Part A such as the subsidized medical insurance provided under Part B, and prescription drug coverage under Part D are funded with general tax revenue. Unless otherwise noted, all references to Medicare from this point forward will mean Part A specifically.

The Social Security and Medicare trust funds face a long-term fiscal imbalance, meaning that the future benefits owed to participants exceed the future payroll taxes that the government expects to collect. Without any further action, Social Security benefits will be automatically reduced starting in 2034, and Medicare benefits will be reduced in 2031. To close the gap, the Social Security trust fund is projected to require additional taxes equal to 3.6 percent of covered payroll over the next 75 years, while Medicare will require an additional 0.6 percent.2

Whether immigration will improve or worsen the fiscal imbalance described above depends on the specific policy under consideration.

Illegal Immigration. Illegal immigration improves the finances of Social Security and Medicare for a simple reason: Although illegal immigrants are generally not eligible to collect Social Security and Medicare benefits, many still pay taxes into the system.3 These taxes function as free contributions to the trust funds, as long as the illegal immigrants remain ineligible for benefits. (See the Amnesty section below.)

How do illegal immigrants who are ineligible for benefits still contribute payroll taxes? They do so with a Social Security Number (SSN) acquired one of several ways. They may have received a valid SSN via a temporary work permit but have since overstayed their visa or otherwise lost their status; they may have faked their identity to use someone elses SSN or to acquire their own fraudulently; or they may use an entirely fake SSN.4

A 2013 report from the Social Security Administration estimated that roughly half of illegal immigrant workers use an SSN.5 Two subsequent developments suggest that figure is now higher. First, visa overstayers contributed more to the illegal immigrant population in the 2010s than did people who crossed the border without authorization.6 Second, although border crossings have surged to record levels in this decade, the Biden administrations generous use of the parole power has granted temporary work permits to large numbers of migrants who will not be eligible for entitlement benefits when (and if) their parole expires. In any case, when the number of illegal immigrants who contribute payroll taxes increases, so does the benefit for the Social Security and Medicare trust funds.

Amnesty for Illegal Immigrants. Any policy that grants illegal immigrants amnesty i.e., the right to live permanently in the U.S. will likely include work permits and subsequent eligibility for Social Security and Medicare. That eligibility would impose steep costs on the trust funds for two reasons. First, as described above, many illegal immigrants are already paying into the system. Their contributions are in fact part of the Congressional Budget Offices baseline budgetary forecasts. Amnesty would require the government to bear the added cost of these recipients status as new beneficiaries without the added revenue that would normally come from new contributors.7 Second, illegal immigrants tend to earn less and work fewer years in the U.S. than the average participant, meaning amnesty will provide them an above-average return on their contributions.

In short, illegal immigrants as a group are net contributors who partially pay into the trust funds while receiving little in return, but amnesty would transform them into net drains who receive more in benefits than they contribute in taxes. CIS has estimated the per-recipient cost of this dramatic change in status to be $129,000 in present value.8 If 10 million illegal immigrants receive amnesty, the total cost to Social Security and Medicare would be roughly $1.3 trillion, equivalent to a one-time transfer of 6 percent of GDP.9

Legal Immigration in the First Generation. The previous two cases were unambiguous. Illegal immigration increases tax contributions while costing little in new benefits. Amnesty increases benefits while adding little in new tax contributions. By contrast, welcoming new legal immigrants causes substantial increases in both tax contributions and benefit obligations. Determining the net fiscal impact in this case will depend largely on each immigrants income and career duration. Based on a CIS analysis of 2019 data from the American Community Survey (ACS), working-age legal immigrants earned an annual income of about $50,000, which is greater than the $46,000 earned by natives.10 However, because the average age of arrival for legal immigrants was 35, their career durations will be significantly shorter. As noted in the Preliminaries section above, the progressive benefit structures of Social Security and Medicare give shorter-career workers a higher return on their contributions.

A complete fiscal-impact calculation involving income, career duration, longevity, and other factors is beyond the scope of this report. Generally speaking, however, younger and higher-earning legal immigrants will be net contributors to the trust funds during their lifetimes, while older and lower-earning immigrants will be net drains.11

Legal Immigration Extended to the Second Generation. Up to this point, we have analyzed the impact of immigrants within their own lifetimes. If the present value of an immigrants taxes paid is less than the present value of benefits received, then that immigrant is said to be a net drain. But perhaps the entry of immigrants who are net drains within their own lifetimes could still ultimately benefit the trust funds if we consider the next generation. The theory is that the average low-earning immigrant will have several children who collectively pay more into the system than their parent took out.

Unfortunately, immigrant fertility tends to be too low for this theory to work, even among less-skilled groups. Analysis of 2019 ACS data shows that legal immigrants with no more than a high school diploma had a total fertility rate of 2.06 per woman, which is merely replacement level. This one-for-one population replacement (two children per couple) is insufficient to maintain the current ratio of approximately 2.8 workers for every retiree even if, unrealistically, all of the immigrants offspring became working adults. (About 74 percent of Americans ages 18 to 64 are currently working.)

Continuous Legal Immigration. The Social Security trustees project that increasing immigration going forward will lessen the fiscal imbalance over the next 75 years.12 Keep in mind, however, that the trustees are estimating the impact of continuous immigration, not the marginal impact. The immigrants who arrive near the end of those 75 years have the most positive impact because their tax contributions are included in the projection period, while their retirements will occur beyond it. These later-arriving immigrants help to pay for the immigrants who arrive earlier in the period, but they will eventually become costly themselves as their retirements start to fall within the shifting 75-year window which necessitates more immigration, and so on.

The assumption of continuous immigration can generate results that seem almost paradoxical. Even if every new immigrant imposes a lifetime net cost, a high-immigration policy could still appear to have a positive effect as long as the flow continues indefinitely. The term Ponzi scheme is sometimes seen as an epithet, but it accurately describes this funding strategy. Earlier participants are paid with the contributions from new participants, creating an ever-larger liability that would bankrupt the system if the supply of new participants were to ever falter.

We have seen that the impact of immigration on Social Security and Medicare depends on the specific policy under consideration. Illegal immigration improves the solvency of the trust funds, but granting amnesty would reverse those gains and impose additional costs. The impact of new legal immigrants is less clear-cut, as the arrival age and earnings of those immigrants will generally determine their status as net contributors or net drains. Continuous immigration could theoretically keep the programs running even when the immigrants are net drains, but whether such a Ponzi scheme is sustainable is unclear.

Given these differential effects, could expanding immigration allow the U.S. to avoid tax increases and spending cuts when addressing the long-term fiscal imbalance faced by Social Security and Medicare? Not as a practical matter. While carefully selected legal immigrants can be net contributors, attempts to use mass immigration as a comprehensive fix for the trust funds would be fraught with risk. For example, although more illegal immigrants (or legal immigrants ineligible for benefits) would certainly bolster the trust funds, the presence of so many second-class residents would generate political pressure for regularization and subsequent benefit eligibility. Similarly, continually importing low-skill immigrants as part of a Ponzi scheme would result in a fiscal crisis if at any point the requisite number of immigrants could no longer be recruited.

Even leaving aside those risks, the sheer number of immigrants required to make Social Security and Medicare solvent is unrealistic. CIS has estimated that immigration would need to rise to five times its current annual level just to maintain todays working-age share of the population through 2060.13 Even more immigration on top of that would be needed to raise the working-age share to a point where it generates a trust-fund surplus. Such a dramatic transformation of the U.S. population would cause economic, cultural, and political changes that transcend the impact on trust-fund solvency.

Rather than looking to immigration as an outside fix for the fiscal imbalances faced by Social Security and Medicare, policymakers should acknowledge that any practical solution will primarily involve a combination of tax increases and benefit reductions that encourage Americans to live within their means.

1 Online Benefits Calculator, Social Security Administration

2 Social Security and Medicare Boards of Trustees, A Summary of the 2023 Annual Reports, Social Security Administration.

3 Some illegal immigrants have a temporary or deferred status that entitles them to receive retirement benefits for the duration of that status. Examples include parole, DACA, and TPS. See William R. Morton and Audrey Singer, Social Security Benefits for Noncitizens, Congressional Research Service, November 17, 2016.

4 For more detail on illegal immigrants with SSNs, including those who are currently eligible for benefits through programs such as DACA, see Steven A. Camarota, Estimating the Number of Illegal Immigrants Who Might Get Covid Relief Payments, Center for Immigration Studies, March 22, 2021.

5 Stephen Goss, et. al., Effects of Unauthorized Immigration on the Actuarial Status of the Social Security Trust Funds, SSA Actuarial Note No. 151, April 2013.

6 Robert Warren and Donald Kerwin, The 2,000 Mile Wall in Search of a Purpose, Journal on Migration and Human Security, Vol. 5, No. 1, pp. 124-136.

7 The added revenue would not be zero, however. Since illegal immigrants tend to experience wage increases after amnesty, their payroll taxes would also be higher. This increase is far too small to offset the added cost of their benefits. See Jason Richwine, Amnesty Would Impose Large Costs on Social Security and Medicare, Center for Immigration Studies, April 5, 2021, EN11.

8 Richwine, Amnesty Would Impose Large Costs on Social Security and Medicare.

9 A present value converts a long stream of future payments into a single upfront cost, adjusting for the time value of money. In this case, an amnesty for 10 million illegal immigrants would impose the equivalent of an immediate one-time cost of $1.3 trillion on American taxpayers. The actual payments would, of course, be distributed piecemeal over many years, and the simple sum of those payments (without discounting future values) would be much more than $1.3 trillion.

10 Legal immigrants are three years older than natives on average. After netting out the effect of age, the two groups have essentially identical incomes.

11 An exception to this rule are immigrants who arrive so late in life that they are unable to obtain the 10 working years needed to qualify for Social Security and Medicare. These immigrants would not be net drains on the trust funds, although they may, of course, consume means-tested benefits, such as Medicaid.

12 The impact would be notably small. The 35 percent increase in immigration contemplated by the trustees in their high-immigration scenario would reduce the 75-year actuarial deficit by just 11 percent. See The 2023 OASDI Trustees Report, Social Security Administration, Table VI.D3.

13 Steven A. Camarota and Karen Zeigler, Projecting the Impact of Immigration on the U.S. Population, Center for Immigration Studies, February 4, 2019.

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The Impact of Immigration on Social Security and Medicare: A ... - Immigration Blog