Obama's Amnesty Will Create A Fiscal Nightmare For Entitlements

Posted 12/01/2014 06:34 PM ET

The White House recently conceded that President Obama's executive order effectively legalizing an estimated 5 million undocumented immigrants means that newly legalized workers will contribute to Social Security and Medicare and be eligible for benefits.

Does the president have any idea how much money his action could cost the country — i.e., taxpayers?

While Obama's executive order creates a three-year temporary permit, he surely thinks that Republicans wouldn't dare repeal it.

Thus, responsible economists and policy experts must consider the long-term costs of his newly imposed financial threat to the Social Security and Medicare programs.

We do not yet know what the demographics of the 5 million will be, though estimates are that more than 4 million will be of working age.

What we do know is that both Social Security and Medicare are already falling off a fiscal cliff.

The Social Security and Medicare Trust Fund trustees estimate the two program's combined long-term unfunded liabilities — the estimated amount the government will have to pay in benefits above what it expects to receive — at about $49 trillion. Obama's amnesty action greatly exacerbates the problem, because retirees get back far more than they pay in.

For example, Urban Institute tax economist Eugene Steuerle estimates a married couple — both of whom earned the average income ($44,800 in 2013 dollars) over their working careers and who retire at 65 in 2030 — will pay in about $1 million in payroll taxes over their working careers and receive $1.35 million in benefits from the two programs ($712,000 from Social Security and $638,000 from Medicare).

If there is only one worker in the family the taxes paid are significantly less, but the benefits received are only a little less, since one eligible spouse qualifies both for the benefits.

Steuerle estimates that a one-earner family making the average wage will pay in $502,000, but receive $1.2 million in benefits ($570,000 for Social Security and $638,000 for Medicare) for both family members.

Thus a working couple with both making the average income retiring in 2030 can expect to net about $350,000 more in benefits than they pay in payroll taxes. And a one-earner couple would receive $700,000 more.

Because the U.S. pays hundreds of thousands of dollars in retirement benefits, on average, for each new retiree, whether part of Obama's amnesty program or not, the president has just vastly worsened the long-term financial condition of the country's two primary retirement safety nets.

But Obama's newly legalized workers will impose even heavier losses than Steuerle's examples.

Most workers pay into the programs for their working careers, between 40 and 50 years. But millions of Obama's newly legalized are working-age adults with children, so many could be in their 40s or older.

Thus they could pay FICA taxes for the next, say, 15 or 20 years — less than half the average American worker — and be eligible for the full array of Social Security and Medicare benefits.

In addition, most will be lower-income workers. The U.S. Bureau of Labor Statistics estimates that foreign-born, full-time workers earn about 80% of native-born Americans ($33,500 vs. $41,900).

Social Security is a social insurance program and is structured to provide disproportionately more benefits for lower-income workers. Medicare pays the same regardless of how much a worker pays in.

To be sure, these new workers' entry will likely help the trust funds initially, because most will be paying in rather than taking out.

Under current rules, workers must pay FICA taxes for 40 quarters (10 years total) before being fully eligible for the programs. But within a few decades the oldest will start retiring.

Given the demographic unknowns, estimating the amnesty's financial cost to our retirement programs — and so to U.S. taxpayers — can only be approximate.

But using a basic simulation model, we believe the government will receive about $500 billion in payroll tax revenue (including Part B and drug premiums), and expect it to pay out some $2 trillion in benefits over several decades.

Paying in a minimum of 10 years and getting perhaps decades of income and health care benefits has got to be the best deal around.

In one executive order Obama may have created his biggest income transfer scheme yet, and imposed the worst financial challenge to our two already-struggling retirement programs.

And millions of Americans can expect to see their taxes go up in the future to pay for it.

• Matthews is a resident scholar with the Institute for Policy Innovation in Dallas.
• Litow is a retired actuary and past chairman of the Social Insurance Public Finance Section of the Society of Actuaries.