How immigration reform could impact Social Security

President Barack Obama’s plan to protect millions of illegal immigrants from deportation not only sparked a political firestorm over his unilateral action but raised questions about the future impact of those newly documented workers on the Social Security system.

Under the president’s executive order, undocumented immigrants who have lived in the United States for at least five years and whose children are American citizens or legal permanent residents would be eligible for deportation deferrals after they had passed a criminal background check and paid required taxes and fees.

The estimated 5 million immigrants — less than half of the undocumented population — would be protected under the president’s executive order but would not be entitled to federal assistance such as food stamps, student financial aid or subsidized health insurance through the Affordable Care Act.

But those who obtain work permits and are issued Social Security numbers would be subject to payroll taxes that fund Social Security and Medicare.

The taxes are split evenly between employees and employers, with each paying 6.2% on earnings up to $117,000 in 2014 to fund Social Security and 1.45% on all earnings to pay for Medicare.

After working a minimum of 10 years, these immigrants would be eligible for retirement and Medicare benefits when they reach retirement age, assuming they were still lawfully in the country.

DETAILED MEMO

Last year, Social Security chief actuary Stephen Goss and his staff wrote a detailed memo on the impact of illegal immigrants on the Social Security system.

The document responded to questions raised during congressional consideration of immigration reform legislation that passed in the Senate but later died in the Republican-controlled House.

The Department of Homeland Security estimates 11.5 million unauthorized immigrants were living in the United States in 2011. Mr. Goss estimated about 3.1 million of them were working and paying Social Security taxes in 2010.

How do illegal immigrants contribute to Social Security?

Some of them had temporary work authorizations at one time but overstayed the terms of their visas. Others obtained fraudulent birth certificates to get a Social Security number so they could work. And still others use a Social Security number that does not match their name. When a name and number do not match, their payroll taxes are credited to the “earnings suspense file.”

“Due to this mismatch, the worker and employer would be paying payroll taxes, but the earnings would not be credited toward later receipt of benefits,” Mr. Goss wrote in the report.

As a result, earnings by unauthorized immigrants resulted in a net positive effect on Social Security’s financial status, contributing roughly $12 billion to the cash flow of the program for 2010.

‘NATURAL-BORN CITIZENS’

“Beyond the taxes paid and benefits received by unauthorized workers, the larger effect on the long-term actuarial status of the [Social Security] trust funds derives from the children born in the U.S. to these immigrants,” Mr. Goss said. “These children are natural-born citizens and add to the growth in the overall U.S. population,” he added. “This contribution to future generations of workers is the largest part of the effect on the actuarial status for both legal and other immigrants.”

That is the crux of the matter. The U.S. population is aging. The number of tax-paying workers relative to benefit-receiving retirees continues to fall. An infusion of younger, tax-paying workers could mitigate the projected shortfall in Social Security revenues as aging baby boomers continue to retire and draw benefits.

Despite the furor over the president’s immigration proposal, it will not be enough to deal with the changing face of America. Always known as the world’s melting pot, America is on the cusp of becoming a country with no racial majority. Three years ago, minority births outpaced white births for the first time. Hispanics are the fastest-growing new minority. Asians are second.

“Without these expanding groups, American could face a bleak future,” William Frey, a leading demographer and senior fellow at the Brookings Institution, wrote in his new book, Diversity Explosion.
“The future well-being of seniors and the nation as a whole depends on the ability of today’s youth to succeed in tomorrow’s labor force,” Mr. Frey wrote. “Youth will play a central role in contributing to the nation’s economy and to the retirement and medical care programs that directly benefit the older population.”

This new generation of young minorities, who are having children faster than whites, is infusing our aging labor force with vitality and innovation, he wrote. Society, the economy and politics will never be the same.

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