This is How Immigration Can Save Social Security
Wondering how immigration affects social security? Our social security system is facing many problems today. So let’s take a look at how Immigration can save social security.
Social Security is facing some major financial problems that need to be dealt with in the next 11 years. If these concerns aren’t resolved, then by the year 2034, everybody’s benefit will need to be cut by 22%. There have been many proposals to fix these financial issues, but all solutions involve either raising taxes, cutting benefits, or both.
Most working people do not want their taxes raised. And most retired people do not want their Social Security benefits cut.
There is another solution that nobody talks about: significantly increasing immigration into the US.
Immigration is a sensitive political issue. Simply looking at the numbers, though, and it may be the best solution to fix our Social Security system. The way that immigration affects social security can’t be overlooked.
Previous Solutions
Our Social Security system faced similar financial problems back in the early 1980s. Those issues were addressed by raising the FICA tax percentage (Social Security taxes), and gradually raising the Full Retirement Age from 65 to 67. Our government uses the money received from FICA taxes to pay people currently receiving their Social Security benefits. In 1983, that allowed them to bring in more money than they were giving out in benefit payments.
That was the case for almost 30 years. Any extra money was put into a surplus fund. The current balance in that surplus fund is $2.7 trillion. But in 2013, less money was brought in from FICA taxes than what was given out in benefit payments. In order to make up the difference, they started to take money out of the surplus fund. This trend has continued, and every year since 2013, a larger amount of money from the surplus fund is withdrawn.
Baby Boomers
One major factor driving this crisis is the number of baby boomers who will retire in the next 10 years. They will be claiming their Social Security Benefits, while fewer workers join the workforce. If nothing is done to address this shortfall, the surplus fund will be empty by the year 2034. There will be no money left to make up for the revenue shortfall. If hat happens, Social Security will have to decrease everybody’s benefit by 22%.
Ratio of Workers
It isn’t just a 1:1 replacement, either. Basically, for every new person receiving Social Security benefits, we need about three new workers to join the workforce.
Every year, about 3 – 3.5 million new people claim their Social Security benefits. And every year, 2 – 2.5 million people die (mostly seniors who claim Social Security Benefits). Since 2010, we’ve experienced a net increase in Social Security recipients of 1 – 1.25 million people every year. That means we need about 3 – 3.75 million new workers to join the workforce every year to support the number of new Social Security recipients.
This is referred to as the: “ratio of workers to Social Security recipients”. It compares the number of workers currently in the workforce to the number of people receiving their Social Security benefits.
In 1940, the ratio was 42:1. That means 42 people were working for every one person collecting their Social Security benefits. But note, that was the first year Social Security started to make benefit payments. Very few people received Social Security in 1940. That ratio dropped significantly as more people claimed Social Security.
How has the Ratio of Workers Evolved?
Below is the history of our “ratio of workers to Social Security recipients” in 10-year increments starting in 1940:
- 1940 – 42 : 1
- 1950 – 16 : 1
- 1960 – 5 : 1
- 1970 – 3.7 : 1
- 1980 – 3.2 : 1
- 1990 – 3.4 : 1
- 2000 – 3.4 : 1
- 2010 – 2.9 : 1
- 2022 – 2.8 : 1
- 2035 – 2.3 : 1 (Projected Ratio)
You can see on the chart that from 1970 to 2010, the ratio held above 3:1. But around the year 2008, the first baby boomers reached age 62, and they started to retire and claim.
In 2010, for the first time since Social Security started, the ratio fell below 3:1. It was 2.9:1.
In 2022 the ratio fell further to 2.8:1.
The largest cluster of baby boomers are now approaching retirement. By the year 2035 the ratio of workers to Social Security recipients is projected to fall to 2.3:1. Only having 2.3 workers for every person receiving benefits will put tremendous financial pressure on our Social Security system.
Declining Birthrates Amongst Americans
The number of baby boomers retiring is one issue, but the decreasing number of new workers is another.
We do not have enough new workers, because we are not having enough babies. In order to sustain a country’s population, it needs to have a birth rate of 2.1. That means that people of child bearing age must have, on average, 2.1 babies each to sustain the population. If a country has a birth rate lower than 2.1, their population will decline.
The current birth rate for the US is only 1.65. That isn’t as bad as many of the birth rates in other industrialized countries.
How does the US compare to other countries birth rates?
Japan has a birth rate of 1.34. Italy’s rate is 1.24. Spain’s is 1.23. And – lowest of all – South Korea has a birth rate of only 0.84.
The population in all these countries has been decreasing, and it looks like it is going to continue. Eventually this will create huge economic problems, and threaten the sustainability of their social pension systems.
Most of those countries have tried increasing their birth rate by paying people to have babies. However, those programs have not been successful. Recently, the Prime Minister of Japan, Fumio Kishida, made the statement that: “Japan is on the brink of not being able to maintain social functions”. All of these countries are facing a serious demographic crisis, and without a viable solution, will result in catastrophic consequences for their economies and societies.
Even if they are able to substantially increase their birth rates, it would take 20 – 25 years for all the babies to grow up and enter the workforce. By then, it may be too late.
Immigration Can Save Social Security
The best solution for this problem is increased immigration.
The US is in better shape because even though the birth rate in the US is only 1.65 – which by itself cannot maintain our population – our population has not been declining: it has been increasing.
The major reason for this is immigration. Fortunately, people from all over the world want to immigrate to the US. For the last 20 years, immigration has been the primary source of our population growth. In fact, over a five-year period from 2016 to 2021, it is estimated that immigration was responsible for 80% – 90% of our population growth.
The Positives
With increased immigration, a number of very positive things can happen. Immigrants have an immediate impact on increasing the number of workers in our economy. Most immigrants tend to be between the ages of 25 – 54, typically wanting to work. In fact, there is a higher percentage of immigrants in the American workforce than there are American-born workers.
In theory, if we increased the birth rate, we would still need to wait 20–25 years or so before those babies are eligible to enter the workforce. But most adult immigrants seek employment right away, and start paying taxes, thus supporting our economy.
The Pew Research Foundation estimates that: “Any further growth in our working age population will come from immigrants and their children, so immigration is going to be really key for sustaining or ideally growing our working age population. We need more workers whose work and whose tax contributions will help support retirees.”
Increase in Workers
If we allow more immigrants into our country every year, that could increase the ratio of workers – or maintain it around 2.8 or 3.0 – or at the very least, slow down the decline. That by itself would relieve some financial stress on our Social Security system.
It is June 2023, and we currently have over 10 million available jobs. At the same time, we also have one of the lowest unemployment rates in the history of our country. We have over 10 million available jobs and nowhere near enough people to fill them. If those jobs were filled, there would be 10 million more people paying FICA taxes, which would greatly reduce the financial pressure on our Social Security system. If we don’t have enough people in this country to fill those jobs, why don’t we increase the number of immigrants?
Higher Birth Rate
Immigrants also have a higher birth rate than American-born people. Increasing immigration will gradually increase our birth rate over time, bringing it from its current level of 1.65, closer to the 2.1 level needed to sustain our population. That will provide a partial longer-term solution, helping to maintain our Social Security and Medicare systems.
More People in the Workforce Without Making Claims
It turns out that many immigrants contribute to our Social Security system by paying FICA taxes while they are working – but they don’t take anything out of the system because they don’t qualify to receive Social Security benefits. This isn’t something that is done intentionally, it is just the way our Social Security system works.
Many of the immigrants that come to the US are over the age of 40. In order to qualify to receive Social Security benefits, they must have worked and made a certain amount of money in the US. The maximum number of quarters (time periods) someone can receive in one year is four. The minimum of 40 quarters is needed to qualify to receive Social Security benefits, meaning they must work for a minimum of 10 years. Many older immigrants will eventually return to their home country before they have worked for 10 years, and before they become qualified to receive benefits. But, while they are working, they are contributing to our Social Security system by paying their FICA taxes. Putting money in without taking any money out helps our Social Security system.
Immigrants Typically Receive Smaller Benefits
In addition to that, many immigrants that do qualify for Social Security, will eventually end up receiving a fairly small benefit, if at all. When determining the amount of the benefit someone will receive, Social Security has a formula that uses their 35 highest wage-earning years. If they do not have 35 years of earnings history, Social Security will include $0 earning years in their formula.
For example, if someone only had 20 years of work history, Social Security will use those 20 years of earnings in their formula, but they will also use 15 years of $0. Those 15 years of $0 will result in a much smaller benefit. Even if some older immigrants do qualify for Social Security, many of them will not have 35 years of work experience, many of them will have substantially less than 35 years of work. Once again, they will be paying into the system but only taking out a fairly small amount of money when they claim their benefits.
Illegal immigration has been in the news a lot, but even illegal immigration has a positive effect on our Social Security system. Many of the illegal immigrants do get a job and work in the US. While they are working, the majority of them pay their FICA taxes, but illegal immigrants cannot qualify to receive Social Security benefits. This is another case when these immigrants are paying into our Social Security system, but will not be taking anything out. It is estimated that every year, illegal immigrants pay FICA taxes of $13 Billion.
Is Social Security Going Broke?
Over the last 12 years, I have given many hundreds of Social Security presentations to live audiences all over the country. After my presentation, I open it up to questions from the audience and overwhelmingly the first question I usually get is:
“Brian, how much longer do you think Social Security will be around, because isn’t it going broke?”
Most people in this country think that Social Security is in a lot of financial trouble and could eventually go broke and stop making benefit payments altogether – that won’t happen. Some experts estimate that without Social Security, if they stopped making benefit payments, then 40% of all people over the age of 65 would live in poverty. That would push 20 – 25 million more people over the age of 65 into poverty. Nobody wants to see that, and it won’t happen.
Everyone’s Benefit Could Be Cut by 2034
The worst thing that could happen if our politicians don’t fix Social Security’s long-term funding issue, then in the year 2034, everyone’s benefit would be cut or reduced by 22%. After they cut everybody’s benefit by 22%, then Social Security can make all its benefit payments through the year 2094 or almost into the next century. That is the worst-case scenario.
Nobody wants to have their benefits cut. Proposals to fix Social Security involve either increasing taxes, decreasing benefits, or a combination of both. Those aren’t good options either.
The truth is simply that immigration affects social security in a positive way, which is why dramatically increasing immigration will help. Looking at it strictly from a Social Security financial perspective, there are no downsides. We would add to our workforce almost immediately, which would help address our current situation. More immigration would help keep our worker to Social Security recipient ratio around 3 to 1, instead of falling to 2.3 to 1 over the next 12 years. Immigrants have a higher birth rate, which would increase our country’s birth rate over time, which will help maintain our population, our economy, and our Social Security and Medicare systems. Those are all positives for Social Security.
Why you should agree
All 67 million people currently receiving Social Security – and the millions of baby boomers about to retire and claim their benefits – should be in favour of this idea. Especially if you don’t want to see your benefits cut by 22% in 11 years from now. Increased immigration won’t solve all of Social Security’s financial problems, but it can be a big help.
Even if they have to increase taxes and decrease benefits, if we increase the number of immigrants coming to the US every year, it will significantly decrease the amount of those tax increases and benefit cuts. It would put Social Security on much better financial footing for the next 50 to 100 years.
If you want to fix our Social Security system, the first place to start is to fixing our immigration system.
