Immigration Is One of Social Security's Biggest Problems -- But Not for the Reason You Might Think

Immigration Is One of Social Security's Biggest Problems -- But Not for the Reason You Might Think

For most retirees, Social Security is more than just a program that delivers a check each month. This payout represents a vital source of income that's proved to be a necessity for our aging workforce.

In each of the last 23 years, national pollster Gallup has surveyed retired Americans to gauge how reliant they are on the income they receive from Social Security. Consistently, between 80% and 90% of respondents point to their Social Security check as a necessity to make ends meet.

With Social Security pulling more people above the federal poverty line than any other social program, its continued success is paramount to the financial well-being of current and future retirees. Unfortunately, Social Security's financial foundation is anything but certain, and numerous factors are to blame, including immigration.

America's leading retirement program is facing a $23 trillion funding shortfall

To preface this discussion, although Social Security's financial foundation is shaky, the program is in absolutely no danger of becoming insolvent or going bankrupt. The issue is simply maintaining the current payout schedule, including cost-of-living adjustments (COLAs), over the next 75 years.

Every year since the first retired-worker benefit was mailed out in 1940, the Social Security Board of Trustees has released a detailed report examining the current financial state of the program. This report also takes into account fiscal and monetary policy shifts, along with demographic changes, to forecast how financially "healthy" the program will be over the long term -- that is, the 75 years following the release of a report.

Since 1985, every Trustees Report has pointed to a long-term unfunded obligation for Social Security. In other words, the forecast calls for revenue collection to be insufficient to cover outlays (benefits and, to a far lesser extent, administrative expenses to run the Social Security program). As of the latest report, the Trustees estimate Social Security is staring down a $23.2 trillion long-term funding shortfall.

However, problems for Social Security are going to crop up well before 2098. The Trustees also estimate that the Old-Age and Survivors Insurance Trust Fund (OASI), which covers payouts to more than 51 million retired workers and 5.8 million survivor beneficiaries each month, will exhaust its asset reserves by 2033. Should the OASI's asset reserves be depleted, sweeping benefit cuts of up to 21% may be necessary to sustain payouts through 2098.

While fiction tends to run rampant on social media message boards -- no,Congress didn't steal from Social Security -- the facts point to ongoing demographic shifts as the real reason this vital program is struggling financially.

These demographic changes include:

• A historically low U.S. birth rate, which is weighing down the worker-to-beneficiary ratio.
• Rising income inequality, with a higher percentage of earned income (wages and salary, not investment income) escaping the 12.4% payroll tax that primarily funds Social Security.
• A 25-year shift in net migration rates into the U.S.

The current immigration trend is a massive problem for Social Security

Similar to lawmakers being blamed for supposedly "stealing" Social Security's asset reserves, social media respondents commonly attribute the worsening financial outlook for America's top retirement program to immigration -- more specifically, undocumented workers entering the country.

While these online commenters are correct about immigration being a problem for Social Security, they're completely wrong about why it's an issue.

One of the key factors in Social Security's long-term financial success is that it requires a steady stream of legal migrants entering the United States. I'll get to the effect of undocumented workers on the program in a moment.

A majority of the legal migrants entering our country are younger, which means they'll spend decades in the labor force before earning the right to a Social Security benefit of their own one day. The key point is that these decades spent in the workforce will generate precious payroll tax revenue that funds the bulk of Social Security payouts.

The intermediate (most likely to occur) forecast from the 2024 Trustees Report calls for an average of 1,244,000 legal net migrants entering the U.S. annually from 2034 through 2098. In 2023, the net migration rate of 2.748 per 1,000 people equates to roughly 920,300 migrants legally entering the U.S. Since 1998, the U.S. net migration rate has fallen every year and declined by a whopping 58%!

In other words, a steady decline in legal net migration into the U.S. is choking off a critical and necessary revenue channel for America's top retirement program.

The surprising truth about traditional Social Security and undocumented migrants

Forecasts from the annual Trustees Reports make it crystal clear that legal immigration contributes positively to Social Security. What you might not realize is that undocumented migrants have also been a benefit to the program.

Before digging into the details, it's important to first recognize the difference between the traditional Social Security program and Supplemental Security Income (SSI), both of which are overseen by the Social Security Administration.

The traditional Social Security program supplies benefits to eligible retired-worker beneficiaries, offers payouts to qualifying workers with long-term disabilities, and provides checks to survivors of deceased workers. It's also funded by the payroll tax, the taxation of benefits, and the interest income earned on its asset reserves, which are invested in special-issue bonds, as required by law.

Undocumented workers without a Social Security number are unable to receive any traditional Social Security benefits or disability coverage... period.

Comparatively, SSI is funded via the federal government's General Fund and can provide monthly benefits to asylum seekers. SSI isn't the same as traditional Social Security, so make sure not to conflate the two completely different programs.

With the above being said, a 2016 report from New American Economy estimates that undocumented workers have generated a $100 billion surplus for Social Security over the prior decade. Put another way, undocumented workers are responsible for about 1% of the revenue Social Security collects, yet aren't entitled to benefits in return.

Immigration is undeniably a problem for Social Security. But when looking at things from a purely financial, nonpolitical standpoint, the real issue is that not enough legal migrants are entering the U.S. to boost payroll tax collection and the worker-to-beneficiary ratio.

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