The Easy Solution to the Social Security Crisis
By: Ben J. Wattenberg
The Budget Resolution passed last month by Congress is supposed to eliminate deficits by the year 2002.
That's nice. But Congress ignored the proverbial 800-pound gorilla smoking a cigar in our living room. The beast has several aliases: "Social Security Crisis," "Entitlement Crisis" and "Third Rail of American Politics" are the most common.
The entitlement situation should by now be familiar. Some 76 million baby boomers were born between 1946 and 1964. The oldest will reach 65 in the year 2011. The boomers are expected to have long lives, increasing total pension costs and requiring expensive medical care. These demands, it is said, will be backed by ever-greater political clout as the proportion of elderly voters becomes ever larger. Their numbers and their power supposedly threaten to swamp the financing of the pay-as-you-go Social Security and Medicare systems. Although Social Security is in surplus now, we are told that in the not-so-long term it will go broke.
Periodically, self-appointed brave souls urge us to face up to "hard choices" to deal with the problem. The usual options are higher taxes or lower benefits, including later retirement ages. These options scare politicians seeking re-election. But, we are told, tough times call for great leaders. Very heroic. And such hard choices may prove to be necessary. But what about considering some easy choices first? There may be some, over there on the supply side of the entitlement equation.
Critics say Social Security is nothing but a pyramid scheme, a chain letter game, a pay-as-you-go Ponzi scheme. There is some truth to that. But life is a Ponzi scheme. Parents pay for their children. When they reach old age, they are most likely supported by those children, either directly or indirectly through Government benefits. And so it goes, through the generations.
The problem comes about when people dramatically slow down their Ponzi-ing - or, in this case, when a very large baby-boom generation reproduces at low rates. When the not-born babies never grow up to pay FICA taxes, the "dependency ratio" shrinks. Back in 1955, there were nearly 9 workers for every retiree; today, there are only 3.3 workers per retiree. At this rate, in 2035 there will only be 2.
If Americans had more babies, wouldn't that help ease the crunch of entitlement spending? Sure. And pro-natalists like me, listening to young people worry over the high cost of child rearing, think it should be easier to raise a family in any event. The current budget deal calls for a $500 per child tax credit. But would that be enough to raise fertility rates? If not, how about $1,500, or $5,000?
Don't laugh and say the country can't afford it. We once had a mildly serious pro-natal policy. People used to josh a pregnant woman, "I see you're having a little deduction." According to C. Eugene Steuerle, an Urban Institute scholar and a tax official in the Reagan Administration, if the standard dependent exemption had kept pace with income and inflation growth since 1948, it would be worth $10,042 today instead of $2,550. An "exemption" is worth less in tax savings than a "credit," but the $10,042 would have a cash value of about $1,500 for a family in the 15 percent tax bracket and almost $3,000 in the 28 percent bracket. Over 18 years, that adds up to $54,000 and about $100,000, respectively, for a two-child family.
That's real money and could make it easier for families who want children to have them. If the fertility rate just went up to the 2.1-child placement rate, that alone would knock 14 p cent off the Social Security Administration 75-year shortfall, or about $700 billion. problem is that pro-natal policies take a lot time. A baby born nine months from now won't even start paying into life's Ponzi scheme for a generation, until he or she starts working. And that happens only after we spend a lot money to raise and educate the child.
A Quicker fix would be instant adults. As it happens, they are available: immigrants.
The median age of a legal immigrant to the United States is 28. These are men and women who have been raised and educated on someone else's nickel. They typically pay into Social Security and Medicare for about years before drawing upon them. And they not add to the major fixed costs of the Federal Government like national defense or interest on the national debt.
A major new study, "The New Americans prepared by the National Research Council shows that immigration is generally good the American economy. It also quantifies certain benefits of immigration: a typical newcomer pays in $80,000 more in taxes than he or s receives over the course of a lifetime. (State governments actually lose $25,000, while Feds gain $105,000.) If we took in more immigrants, there would be greater per capita Federal receipts and less of a Social Security crisis.
There are other reasons to favor a robust immigration rate. America is the only universal nation, with people from everywhere; that's great and poetic thing to be, particularly while we're all wondering about what's going to h pen next in the global economy. Soon America will have a corps of international managers who know India and know America, who are fluent in Hindi and in English. That is what Adam Smith called comparative advantage.
Still, we are told that we are already taking in too many immigrants. In the 1992 campaign Pat Buchanan warned voters that immigrant are swamping America. I don't believe it.
The immigration rate from 1900 to 191 0 was 10.4 immigrants per 1,000 people. At that time, the United States population was about 80 million. We took in about one million immigrants per year, and flourished. Today, we still take in about one million net immigrants per year (including 200,000 to 300,000 illegals). But the rate is only about 3.0 per 1,000 people - in a nation of 265 million. Is that a lot? Picture yourself at a cocktail reception in a big hotel ballroom. There are about 650 people present; the talk is animated, the ice cubes are tinkling. In walks an immigrant couple. And the bozo standing next to you says: "That does it! Buchanan was right! They're swamping this party!"
Suppose we did not go back to those century-old immigration rates but only halfway between what we had then and what we have now. That new rate of 6.7 per 1,000 people would yield about one million additional immigrants per year. In the next 75 years that would cut the Social Security shortfall by 28 percent, amounting to a savings of $1.4 trillion.
The savings would be larger still if we moved toward a policy of "designer immigration," favoring higher-skilled workers who make more money and pay taxes at higher brackets, including Social Security taxes. The National Research Council study shows that an immigrant with less than a high-school education pays in $13,000 less in total taxes than he or she receives over a lifetime, while an immigrant with more than a high-school education pays in $198,000 more. Not a bad deal: someone else' children paying for our parents' pensions.
Could we raise immigration rates? It's said to be politically impossible. Two of the main problems voters have with immigration concern a perceived tide of illegal immigrants an the changing composition of the new arrivals from about 80 percent European before 196 to about 90 percent non-European now. Th "tide" of illegals is exaggerated, but it is a fair complaint. Any plan for more immigration would have to be coupled with tougher strictures against illegals. A step in that direction was taken last year with the passage of a new Federal law, which endorsed a pilot program to screen new employees through use of credit-card-style phone verification of Social Security status.
The issue of ethnic composition is torturous. Charges of discrimination and racism through the air. Yet it can be fairly argued that democratic nation does not have the duty to dramatically change the makeup of its population a few generations. In any case, it might be possible to satisfy most constituencies by raising immigration rates modestly across the board, which offering extra "liberty visas" for a while to people hailing from behind the once-Iron Curtain who for almost half a century were denied the right to immigrate to America or anywhere else.
Funny things tend to happen in immigration politics. When Congress began deliberation about what turned out to be the Immigration Act of 1990, there seemed to be a consensus t restrain legal immigration. Yet the resulting I increased it by about a third, from 600,000 to 800,000. Almost every member of Congress, it seems, has active constituents who favor less restricted immigration.
The chairman of the Senate subcommittee dealing with immigration is Spencer Abraham Republican of Michigan. Abraham likes to note that a third of America's Nobel Prize winner were born overseas; that America is short of engineers (the unemployment rate in the field i 1.7 percent); that 40 percent of our engineering Ph.D.'s are foreign-born; that states with high rates of immigration have lower unemployment than those with low rates, and, not least, that his own grandparents were immigrants.
Perhaps what once seemed to be politic impossible is not. In any case, too often the d bate about entitlements is more in the realm o abstract bookkeeping than public policy, yielding glum conclusions based on scenarios in which assumptions never change - not about immigration levels, not about birth rates.
But supply-side demography offers a different vision. Try to change the numbers. Make it less difficult to raise a family. Make it less difficult for skilled immigrants to pass through the Golden Door and so contribute to American greatness. Those are easy choices.
PO Box 20022, New York, NY 10025
Phone: +1 (212) 557-3163 - Fax: +1 (212) 557-3164