Social Security Has an Immigration Problem — and It’s Getting Worse
Story by Sean Williams , 3/31/22, Motely Fool
If the past dictates the future, between 80% and 90% of today’s U.S. workforce is going to be reliant, in some capacity, on Social Security income when they retire. This 80% to 90% range reflects the percentage of retirees leaning on Social Security as a “major” or “minor” source of income across 20 years of annual Gallup surveys.
Unfortunately, this program responsible for doling out millions of benefit checks each month isn’t on the soundest financial footing. A very big reason for that is America’s worsening immigration problem.
Social Security is facing a greater than $20 trillion funding shortfall
Since 1940, which is when the first retirement benefit checks were issued, the Social Security Board of Trustees has released a lengthy annual report that examines the short-term (10-year) and long-term (75-year) outlook for the program. It’s effectively an under-the-hood look at how much revenue Social Security is bringing in, where that money is being disbursed, and how financially sound the short-term and long-term future of the program is, based on a variety of macroeconomic factors and demographic changes.
For each of the past 38 years, the Social Security Board of Trustees Report has estimated that there would be a long-term funding shortfall. This means the existing payout schedule, including annual cost-of-living adjustments, isn’t sustainable over the next 75 years. The 2022 Trustees Report forecast a $20.4 trillion cash shortfall through 2096.
If there is a silver lining for the program responsible for pulling more than 22 million people (including over 16 million seniors) out of poverty each year, it’s that this projected funding shortfall doesn’t equate to bankruptcy or insolvency for Social Security. If you’ve qualified for a retirement benefit or other protections, such as survivor or disability benefits, you’ll receive a monthly check when eligible.
However, the Trustees Report projects that Old-Age and Survivors Insurance Trust Fund benefits may need to be cut by 23% come 2034 if something isn’t done to fix Social Security’s shortcomings. This would mean hundreds of dollars in monthly benefits being removed from the checks of 48.6 million retired workers in roughly 11 years.
This cash shortfall is a function of more than half a dozen problems. Some are well-known, such as the ongoing retirement of baby boomers from the workforce, which is weighing down the worker-to-beneficiary ratio. Others, such as historically low birth rates, are mostly flying under the radar.
But it’s America’s worsening immigration problem that could be the biggest concern.
Social Security has a huge immigration problem
Look at social media message boards, and you’ll find one commonly repeated viewpoint: That undocumented workers receiving benefits are to blame for Social Security’s financial shortcomings. Immigration into the U.S., in general, seems to be a regular scapegoat for why America’s top retirement program is struggling.
But this school of thought couldn’t be more wrong.
Social Security’s problem isn’t that too many immigrants are flocking to the United States. Rather, it’s that net-legal immigration has been declining for a quarter of a century. Since 1998, the net migration rate into the U.S. has fallen every single year, and is down by an aggregate of 57%, according to data from the United Nations.
Most people legally migrating to the U.S. tend to be younger, which is an extremely important point. These are people who will spend decades in the labor force contributing to Social Security via the payroll tax. The 12.4% payroll tax on earned income (wages and salary) was responsible for providing approximately $981 billion (90.1%) of the $1.088 trillion in revenue Social Security collected in 2021.
The intermediate-cost model in the 2022 Trustees Report — the “intermediate-cost model” is what the Trustees view as the outcome likeliest to happen — is based on average annual total net immigration of 1,246,000 people. Between July 1, 2012, and June 30, 2017, fewer than 955,000 total net migrants entered the U.S. annually, according to data from the World Bank. If net migration into the U.S. continues to fall, or even steadies at these reduced levels, it’s all but a certainty that Social Security’s funding shortfall will grow.
But wait — there’s more
Aside from needing a sustainable influx of legal immigrants into the U.S., it’s equally important to address the misinformation that undocumented workers are a hindrance to the traditional Social Security program. When I say “traditional Social Security program,” I’m talking about paying retirement, survivor, and disabled-worker benefits.
The culprit for the myth likely has to do with conflating traditional Social Security and Supplemental Security Income (SSI). SSI does, on occasion, provide income to persons seeking asylum.
Although the Social Security Administration oversees both programs, traditional Social Security and SSI are funded differently. Whereas SSI is funded by the general funds of the U.S. Treasury, traditional Social Security generates most of its revenue from the payroll tax on earned income, with the taxation of benefits and interest earned on its asset reserves playing a lesser role. The point is that these are two separate programs.
Undocumented workers are unable to receive a Social Security number, which means they cannot collect retirement benefits and won’t qualify for the program’s other protections — like long-term disability and survivor insurance protection.
What’s more, a study from New American Economy showed that undocumented workers contributed $13 billion in payroll tax revenue in 2016. These undocumented workers either used a friend’s or family member’s Social Security number to obtain work, or their employer failed to properly vet the worker. Either way, more than 1% of Social Security’s annual revenue derives from undocumented workers, yet not one cent of benefits from traditional Social Security will be returned to these workers.
Social Security absolutely has an immigration problem — but it may not be what you thought it was.