The federal government barely avoided dipping into its savings accounts last year to help pay Social Security benefits to millions of Americans.
Economists had warned last year that — for the first time in decades — the Social Security Administration would not bring in enough money from payroll taxes and investment income to cover all the disability and retirement checks it owed to millions of Americans. Instead, the agency would need to start taking money from two savings funds: one for the Old-Age and Survivors Insurance program (a.k.a. Social Security) and one for the Disability Insurance program.
Luckily, that dreaded shortfall didn’t materialize — but only just barely, and not for particularly positive reasons.
In their latest Social Security trustees report, which was released Monday, Treasury Department officials and economists said far fewer workers applied for disability benefits in 2018 than they expected, which lowered overall costs. But there’s another reason the government didn’t dip into its reserves, and it’s a bit disturbing: Life expectancy in the US is decreasing. Americans are dying sooner than they once did, which means the government pays out less in benefits.
Those two trends have given Social Security a tiny cushion for the first time in years. Now economists expect the government to collect enough money to cover program costs through the end of 2019, and they don’t expect the savings funds to run dry until 2035 — a year later than previously projected. After that, the government will only have enough money to pay retirees and disabled workers 80 cents for every dollar they’re owed.
Some commentators have framed the latest report as a sign that Social Security is healthier. That’s true, in the short term, but the underlying crisis remains unfixed: There just aren’t enough workers the government can tax to cover benefits for all the baby boomers who are retiring. Unless Congress intervenes, GenXers, millennials, and future generations will struggle to afford their own retirement if they can’t get their full benefits.
The solutions to this problem aren’t mysterious, but they are political. For example, the latest economic estimates show that immigration would help save the Social Security system. Not just legal immigration — illegal immigration, too.
Lower immigration in 2018 will increase the deficit
Government projections about the future of Social Security are revised every year, depending on demographic changes they didn’t foresee. In 2018, economists had anticipated a higher influx of immigrants and refugees. The lower-than-expected rate of immigration, according to the report, will likely increase the deficit.
Both undocumented immigrants and immigrants with legal status pay billions of dollars each year into the Social Security system through payroll taxes. Based on estimates in the trustees report, the more immigrants that come in, the longer the Social Security system will stay solvent.
That’s because immigrants, on average, are a lot younger than the overall US population, so their retirement is far off. And undocumented immigrants pay for Social Security, but they’re not allowed to get benefits.
Here are two charts that show the impact of immigration on the Social Security system. The first chart shows how the Social Security and Disability Insurance trust funds (OASDI) will run out of money if Congress doesn’t do something to boost its reserves, such as increasing legal immigration and closing a tax loophole for rich workers.
The reason for that nosedive is because, for the first time in decades, the Social Security system is running a deficit. Since 2010, the federal government cut more Social Security checks to retirees and disabled workers than it collected in payroll taxes from the current workforce.
But income from other sources, such as investment interest, has helped cover the rest of the cost. That will likely change in 2020, when the federal government will need to start dipping into the $2.9 trillion trust funds to keep paying out benefits.
Furthermore, Social Security now costs more than before because more Americans are retiring. In 1960, about 5.1 workers supported each person receiving a retirement or disability check, and that ratio has been shrinking ever since. In 2013, there were 2.9 workers for every beneficiary. So the current level of payroll taxes is no longer enough to keep the program afloat.
But here’s how immigration could change that:
The number of immigrants in the US peaked in 2005, when the population had 2 million more immigrants than the previous year. That number reached a historic low in 2008, at the start of the Great Recession, but has been ticking back up. In 2014, there were about 1 million more immigrants in the US than the previous year.
Even though the economy has improved as more immigrants join the US workforce, the Trump administration has insisted on restricting all avenues for immigration. And it’s already having an impact on Social Security, according to the latest SSA report. The US experienced a drop in both legal and illegal immigration in 2018, which means fewer workers paid payroll taxes.
If Trump had allowed current immigration levels to stay the same (about 1.6 million more immigrants lived in the US in 2017 than the year before), then Social Security would have a better chance to stay solvent. The SSA’s estimates include authorized immigrants, unauthorized immigrants, and foreign workers on temporary visas.
As the chart shows, any growth in immigration lowers the Social Security deficit. The higher the growth, the lower the deficit.
According to the SSA, the reason is pretty simple. Immigrant workers tend to be younger, so they have a lot more years to work and pay taxes before they retire. But another reason that goes unmentioned in the report is that undocumented immigrants, ironically, provide an added boost to the system because they pay into the Social Security system but they can’t receive benefits.
Undocumented immigrants pay billions of dollars in federal taxes each year. Payroll taxes for Medicare and Social Security are still withheld from their paychecks, even if they use a fake Social Security number on their W-2 form. The IRS estimates that unauthorized workers pay about $9 billion in payroll taxes annually.
A portion of the payroll tax withheld from undocumented immigrants — like all workers — goes into the Social Security Trust Fund (that savings account in the first chart). In 2013, the agency reviewed how much money undocumented workers contributed to the retirement trust fund. The number was even higher than average that year: $13 billion.
The chief actuary of the Social Security Administration, Stephen Goss, estimated that about 1.8 million immigrants were working with fake or stolen Social Security cards in 2010, and he expected that number to reach 3.4 million by 2040.
“We estimate that earnings by unauthorized immigrants result in a net positive effect on Social Security financial status generally,” Goss concluded in the 2013 review.
These numbers are a stark contrast to the often repeated rhetoric that undocumented immigrants are a drain on the US economy — rhetoric repeated by President Donald Trump. But working-class Americans, including many who voted for Trump, need immigrants to help pay for their retirement.
Congress needs to close the tax loophole
Boosting immigration alone isn’t enough to save the Social Security system, though. Immigration lowers the deficit, but it doesn’t eliminate it. One of the main problems is that low-wage and middle-class workers are paying a disproportionate share of their income into the Social Security system.
More affluent workers don’t have to pay the 6.2 percent tax on any income they earn above $128,400, so a worker who earns $128,400 a year is paying the exact same amount in Social Security taxes as a billionaire. It’s basically a tax loophole for the wealthy.
In July 2017, a group of Congressional Democrats, led by Rep. Ted Deutch and Sen. Mazie Hirono, introduced a bill to gradually phase out that cap. Under the bill, named the Protecting and Preserving Social Security Act, all wages would be subject to the 6.2 percent tax within seven years.
It would also adjust the formula to calculate annual cost-of-living increases for retirees who get Social Security checks, so that the increase better reflects the spending habits of elderly Americans, who tend to spend more of their income on prescription drugs and energy bills.
The proposal would nearly close the deficit. An analysis by the Social Security Administration said it would keep enough money in the trust fund to pay retirees their full retirement benefits for an extra 25 years.
The bill was sent to three House committees. It’s been two years since then, and Congressional leaders still haven’t put it up for a vote.