April 27th, 2010 | Posted in Immigration/Migration
by Marlene Lee, senior research associate, Domestic Programs
This year, for the first time Social Security will take in less in taxes than is paid out in benefits. And by most estimates, the Social Security Trust Fund—designed to cover exactly this type of shortfall—will be exhausted around 2037. A few weeks ago, Robert Reich, Secretary of Labor under President Clinton and Professor of Public Policy at the University of California at Berkeley, proposed immigration as an easy answer to the Social Security funding crisis, or at least as one factor in the combination of steps needed to address this crisis. Reich says that increased immigration would likely have a greater impact than any other proposed measures, such as raising payroll taxes and the age of eligibility for social security benefits. His argument rests on immigrants’ younger age than non-immigrants and on his attributing the Social Security funding crisis to the decreasing number of workers per retiree. According to Reich, logically and simply, increasing the number of immigrants will increase the number of workers per retiree because young immigrants will work for decades to come.
But as many demographic studies suggest, the amount of immigration needed to produce the desired elderly dependency ratio (the retirement age population divided by the working age population) may not be desirable or achievable. In a PRB online discussion, Ronald Lee, a Berkeley economist and demographer, said he estimates that 395 million immigrants would be needed. UN estimates are even higher. Also, there is the question of how long it takes immigration to change a population’s age structure. Immigrants entering the United States will themselves age, some becoming eligible to participate in Social Security. Ken Johnson from the University of New Hampshire and Dan Lichter from Cornell University show that higher fertility among some immigrant groups fuels natural increase in areas where the population would otherwise have declined. But the impact of immigrant fertility on a population’s age structure takes a long time to manifest itself.
Finally, immigration may help close the financial gap in Social Security through its effect on economic growth. But economic growth depends on both the growth rate of labor and the growth rate of labor productivity. The effect of population aging on labor productivity is complex, particularly in an era of improved health among the older population and rapid technological progress. Historically, changes in the amount of capital available per worker as well as the pace of technology and the experience of the workforce have been the main factors that affect labor productivity. Alan Greenspan recently concluded, “…it is heightened growth of output per worker that presents the greatest potential to boost the growth of gross domestic product. A significant rise in the growth of labor productivity will be necessary if the standard of living of retirees is to be maintained and that of workers is to continue advancing.”
The effect of immigration on labor force growth seems pretty obvious, if not quite as simple as Reich argues, but its effect on labor productivity seems less obvious. Immigration’s effect on labor productivity would depend on the composition of the immigrant population. In the United States, the immigrant population includes both low-skilled and highly skilled workers, but the global competition for skilled workers has increased, keeping some potential skilled immigrants in their home countries or drawing them to countries other than the United States.