The Four Million Dollar Immigrant
Most folks with a demographic bent appreciate the fact that less immigration to the US increases the financial constraints on our Social Security system. So, naturally, when the Social Security actuaries published their 2018 report this week, I wanted to see if I could quantify that impact. Curiously, in last year’s report (2017), I noticed that no changes were made to the immigration assumptions from the previous report (2016) despite all the hoopla over the new president’s drive to curtail both legal and illegal immigration. Properly, in my view, they don’t change anything until they see the legislation.
The report is daunting, even for a seasoned numbers guy like yours truly, but here are the basics. The actuaries developed three scenarios. The low-cost scenario illustrates demographic trends financially favorable to the system; for example, higher fertility (leading to a larger future labor force), higher mortality (reducing the number of beneficiaries in the short term), and higher immigration (producing a near-term boost to the number of workers contributing their payroll tax).
The high-cost scenario illustrates opposite trends: lower fertility, lower mortality, and lower immigration, all contributing to fewer dollars going into the system or more dollars spent by the system on current beneficiaries. This scenario is actually more consistent with current trends reflecting economic and cultural factors pushing the total fertility rate closer to 1.8 than to 2.0, for example. Mortality gains (i.e. increases in life expectancy) suffered a set-back to its long-term favorable trend, as was reported recently, due in part to opioid abuse in middle-age, but that trend is more likely temporary than not.
The big mover of demographic trends (no pun intended) is immigration which, unlike fertility and mortality, can turn on a dime or a presidential election. In fact, immigration from Mexico had been trending down for several years prior to the Great Recession (2008-2009) which pushed it down even further. “Other-than-legal” entrants, as the Social Security actuaries politely call them, increased in recent years coming more from Central America than from Mexico, and looking more for asylum from violence than for risky opportunities for work. “Risky” because even under Obama border enforcement and deportations had increased. So the underlying trend in immigration, predating recent policy changes, is basically down and unfavorable to the Social Security system.
There is an Intermediate Scenario, alas the one favored by the actuaries, that walks a fine line between the low-cost and high-cost scenarios. I wanted to parse the effects of lower immigration due to new administration policies on the long-term viability of the Social Security trust accounts. This was no small task given all the countervailing financial forces and policies impacting the financing of the trust funds. Spoiler alert: the trust funds are generally safe for the long term even after costs begin to exceed current income, but that’s another story.
Happily (don’t you love actuarial science?), the report provides a “sensitivity” analysis that illustrates the separate effects of each demographic assumption versus the Intermediate Scenario. That is, the scenario summaries (your basic Executive Summaries for Congress) show the combined effects of all the factors that contribute to higher or lower costs to the system, but the sensitivity analysis separates the specific impact of more or less immigration alone versus the “preferred” Intermediate Scenario. So, what’s the bottom line?
Here’s a quote from deep within the 270 page report: “Increasing average annual total net immigration by 100,000 persons improves the long-range actuarial balance by about 0.08 percent of taxable payroll.” (p. 181) Interesting, but what is taxable payroll? Appendix Table VI.G6 (p. 216) shows that taxable payroll for 2018 is estimated at $7,261 billion or $7,261,000,000,000. Let’s take 0.08 percent (0.0008) of that to see the dollar impact of 100,000 immigrants -- $5,808,800,000. Then, let’s divide that by 100,000 to see the impact of one immigrant -- $58,088. That’s the average loss to the Social Security trust funds per immigrant denied entry or deported in 2018.
Business people like to talk about the lifetime value of a customer. Actuaries and demographers refer to person-years lived by synthetic cohorts. You guessed it – similar concepts. The Social Security actuaries project the financial status of the trust funds out 75 years, thank you very much. According to Boston University economics professor Lawrence Kotlikoff, a better reading of the health of the system would emphasize a projection out to infinity because our children’s children and their children would be interested.
My analysis takes a hypothetical 18-year-old immigrant in 2018 and calculates their contribution to the system during their working years, say 18 to 65, which is 47 years. If you run the same calculation taking 0.08 percent of taxable payroll out 47 years (divide by 100,000) and add up the working-lifetime result (lifetime value) for a single immigrant you get $8.1 million dollars! But that’s not inflation adjusted, so we need to use the projected, adjusted Consumer Price Index (CPI) as provided in the report to see the “real” value in today’s dollars. Bottomline: the lifetime value of adding one working immigrant to our Social Security system is about $4 million in 2018 dollars. Remember, this takes into account projected real growth of taxable payroll over 47 years and the interest earned by payroll taxes in the trust funds but no change in current payroll tax policy.
I would appreciate your comments. If you would like to replicate this analysis, please do so. You can find the report here.