Social Security Benefits of Immigrants and U.S. Born
ISSUES IN THE ECONOMICS OF INTEGRATION, George J. Borjas, ed., Univ. of Chicago Press, NBER, 2000
Posted: 31 Mar 2000
For each year of work under the Social Security System, immigrants realize a higher benefit than U.S. born, even when their earnings are identical in all years the immigrant has been in the U.S. Two features of the social security benefit calculation are responsible for the relatively favorable treatment of immigrants: the social security benefit formula transfers benefits toward those with low lifetime covered earnings, and all years an immigrant spends outside the U.S. are treated as years of zero earnings. Immigrants with high earnings who have worked in the U.S. for only a decade or two benefit most from these procedures.
If instead, earnings were averaged only over the years an immigrant resides in the U.S., and benefits were prorated based on the share of a 35 or 40 year base period spent in residence, immigrants would receive the same return on their social security taxes as U.S. born who have the same earnings in each year. For a sample from the Health and Retirement Study, a group born from 1931 to 1941, prorating reduces the social security benefits of immigrants by 7 to 15 percent. For immigrants who entered in the 1980's, the comparable reductions in benefits would be over 30 percent.
It is difficult to justify the current procedures determining social security benefits for immigrants on the basis of income or wealth differences between U.S. and foreign born. Among HRS respondents, mean total wealth of immigrants is 92 percent of the mean total wealth of U.S. born, while the mean income of immigrants exceeds the mean income of U.S. born by 3 percent. But income and wealth are less evenly distributed among foreign born than U.S. born. The top quarter among foreign born have higher incomes than U.S. born and similar wealth, while the bottom quarters of foreign born have lower wealth and income than U.S. born.
Depending on whether the appropriate period for calculating benefits is taken to be 35 or 40 years, prorating would reduce the present value of benefit payments to the cohort of immigrants born from 1932 to 1941 (91 percent of the HRS cohort) by $7.5 billion or $15 billion, respectively. The 1932 to 1941 cohort represents one seventh of all foreign born who are now 25 to 64.
One can also ask whether, from a purely selfish financial viewpoint, if U.S. born participants would have preferred to have immigrants from the HRS cohort included in social security. The answer is yes. Despite the better deal they receive, like U.S. born participants in the HRS cohort, most immigrants in the HRS cohort will pay more in taxes than they will receive in benefits, although just barely. Taxes received from immigrants who subsequently emigrate without collecting benefits tip the balance in favor of including immigrants from the HRS cohort.
JEL Classification: J14, J26, H55, F22
Suggested Citation: Suggested Citation