Amnesty Would Cost the Social Security and Medicare Trust Funds Hundreds of Billions

Amnesty Would Cost the Social Security and Medicare Trust Funds Hundreds of Billions of Dollars




By Jason Richwine on February 22, 2021

Although illegal immigration flouts the rule of law and strains local communities, it does generate one unambiguous benefit — namely, free contributions to our Social Security and Medicare trust funds.

Amnesty would transform those contributions into costs totaling hundreds of billions of dollars.

The reasoning here is simple. Under current law, most illegal immigrants cannot access Social Security or Medicare benefits even when they reach retirement age.

Nevertheless, roughly half of illegal immigrants do have payroll taxes deducted from their wages while they are working. These payroll tax contributions are generally "free" to American taxpayers because they bolster the trust funds without creating any new benefit obligations.

However, amnesty would qualify recipients for Social Security and Medicare, converting future contributions into large IOUs from the federal government.

The cost difference between the status quo and amnesty is large by any measure.

Consider the following back-of-the-envelope calculation. Based on our analysis of the American Community Survey, the average working-age illegal immigrant is 39 years old and earns $28,500 annually.

Let's say that amnesty boosts his wages by 10 percent immediately; that he receives additional yearly increases of 1.2 percent based on official projections of wage growth minus inflation; and that he works until the full retirement age of 67.

If so, he would collect about $18,640 in annual Social Security benefits. If his lifespan is statistically average, he will collect this annual benefit until he dies at the age of 80.

To understand the magnitude of these future benefits, we need to "discount" the benefit stream, meaning consolidate it into a single upfront cost. Applying a discount rate of 2 percent, the present value of his total lifetime benefits comes to $140,330.

This average illegal immigrant will also pay 12.4 percent of his wages (the sum of the employer and employee contributions) to the Social Security trust fund.

Applying the same assumptions listed above, the present value of his taxes paid after amnesty would be only $94,500, which by itself creates a deficit.

But remember — roughly half of illegal immigrants already contribute payroll taxes even without amnesty.

In other words, the new taxes paid by the average amnesty recipient amount to only half of the $94,500 noted above. The net effect of amnesty is therefore $140,330 minus $47,250, which is about $93,000 per recipient. In any large-scale amnesty, in which millions of illegal immigrants gain legal status, it is easy to see how the net cost could reach into the hundreds of billions of dollars.

This is just a rough estimate. We are currently working on a detailed model that will provide more precise costs for both Social Security and Medicare. Again, however, any reasonable calculation will produce a large cost, simply because amnesty will convert so many outside contributors into actual beneficiaries.

Please note that the costs described here are driven by amnesty itself, not by immigration in general. Whether bringing more immigrants into the U.S. burdens entitlement programs is a complicated question that hinges on issues of fertility and long-term growth. In the context of amnesty vs. the status quo, however, the immigrants are already here — the only issue is whether we will decide to pay them Social Security and Medicare benefits that they otherwise would not receive.

Unfortunately, the Congressional Budget Office usually projects budgetary impacts only 10 years into the future, meaning it will not capture most of the Social Security and Medicare costs associated with amnesty. Costs falling outside of the 10-year budget window are no less real, however. Lawmakers need to be aware of the full, long-term costs of any amnesty legislation that comes up for debate, and those costs will inevitably include hundreds of billions of dollars charged to the Social Security and Medicare trust funds.

Topics: Costs of Immigration, Amnesty and Comprehensive Immigration Reform



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