Immigrants Won’t Pay for Our Pensions—We’ll Pay for Theirs

By | 2018-09-12T20:01:19+00:00 September 13th, 2018|
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Ask any Democrat why they support open borders and invariably they will respond with one of two pre-packaged answers: because “diversity is our strength” or “we need immigrants to pay for our pensions.”

The first argument is a sham: if liberals valued diversity they would welcome conservatives to college campuses and tolerate them online. They don’t. Instead, they protest when anyone to the right of Marx dares speak on campus—remember the “progressive” response to Milo Yiannopoulos at Berkeley? It was an orgy of violence and rioting. Likewise, the Left enthusiastically de-platforms conservative voices on social media.

For Democrats, diversity means intellectual and political homogeneity—with a smattering of ethnic restaurants. Exposing this hypocrisy sufficiently rebuts this nonpoint.

The second argument—that immigrants will pay for our pensions—is far more persuasive. Most people instinctively defer to the “experts” when it comes to economics: “because Milton Friedman said so” is a compelling statement, despite being a perfect example of the call to authority fallacy. Who cares what economists think? What do the data say?

On this point the data are conclusive: immigration will not save America’s welfare system, it will bleed it dry.

Worshipping Ponzi
In an article for the New Yorker, John Cassidy explains why America needs more immigration:

Demographers and economists have been warning that the aging baby-boomer population presents a serious challenge to the nation’s finances, as the ratio of seniors to working-age adults—the age-dependency ratio—rises. The reason is straightforward: Social Security and Medicare are largely financed on a pay-as-you-go basis, which means that some of the taxes paid by current workers are transferred to current retirees. If the dependency ratio rises, the financial burden on the working-age population also increases.

Cassidy’s diagnosis of the problem is correct. America’s population is aging, and this is a problem because our welfare state is structured like a giant Ponzi Scheme. Although taxpayers contribute to the system throughout their lives, they never see this actual money. Instead, they pay for the previous generation’s retirement with assurances that the next generation will pay for theirs. Welfare is a vampire that requires fresh blood to survive. And herein lies the root of Cassidy’s error.

Cassidy proposes three possible solutions. First, we could “reduce the level of retirement benefits significantly—but that would be very unpopular and difficult to achieve politically.” He’s probably right, and any viable reform likely would require a decade of latency in any event.

Second, Cassidy suggests raising the workforce participation rate, which he notes has fallen from 64.6 to 60.4 percent since 2000. (It’s currently around 62.7 percent.) He says this could work temporarily, but it’s just a bandage solution—eventually people will retire. This is also true.

After dismissing the above two options, Cassidy settles upon increasing immigration as the best way forward:

The final option is to welcome more immigrants, particularly younger immigrants, so that, in the coming decades, they and their descendants will find work and contribute to the tax base. Almost all economists agree that immigration raises G.D.P. and stimulates business development by increasing the supply of workers and entrepreneurs.

In essence, immigrants would replace the sons and daughters Americans never had, thus perpetuating the current system indefinitely. This is a bizarre conclusion to draw for the simple fact that immigrants are a net burden on the welfare state—how will they pay for our Medicaid tomorrow when we’re paying for their Medicaid today?

Bloodletting Leviathan
The preponderance of data show that immigration and socialism are incompatible.

A 2017 study from the National Academies of Sciences, Engineering, and Medicine found that although America’s immigrant population is (theoretically) revenue-neutral, most immigrants are actually a drain on the system. The economic impact of immigrants follows a Pareto Distribution—commonly known as the 80-20 Rule, this just means that a hyper-productive few immigrants provide most of the economic gains, while the majority of immigrants contribute (less than) nothing.

Specifically, half of all immigrants actually receive more in government handouts than they pay in taxes, while another third contribute roughly as much as they receive. Only around 15 percent of immigrants contribute to the economy in a meaningful way.

Cassidy overlooks the significance of this non-linear data: if immigration as a whole is revenue-neutral then increasing the immigration rate will do nothing to save the welfare system. Instead, we should cut immigration by (at least) half to reduce the strain on the current system, and focus on attracting more high-performers.

When it comes to immigration, less is more.

Other major studies in other Western countries reach similar conclusions.  For example, a study conducted by Denmark’s Ministry of Finance found that immigrants were a net drain on the nation’s welfare state. In fact, non-EU immigrants, and their descendants, consumed 59 percent of the tax surplus collected from native Danes. This is not surprising, since some 84 percent of all welfare recipients in Denmark are immigrants, or their descendants. Immigration is a net burden on Denmark.

Another major study from the University College of London found that immigrants in the U.K. consumed far more in welfare than they paid in taxes. The study looked at the Labour government’s mass immigration push between 1995 and 2011. The researchers found that immigrants from the European Economic Area made a small, but positive net contribution to the British economy of £4.4 billion ($5.7 billion) during the period. However, non-European immigrants (primarily from South Asia, the Middle East, and Africa) cost the British economy a net £120 billion (around $156 billion).

Together, these studies show that mass immigration undermines domestic welfare systems for the simple fact that most immigrants take more than they give. They also show that the economic benefits of immigration are non-linear: a minority of immigrants contribute the majority of the gains, whereas most immigrants contribute little or are a net drag on outcomes. In light of these facts, Cassidy’s conclusion that immigration will save the welfare state clearly is wrong.

Finding Narnia
Not only is Cassidy wrong, his argument is based on a false dilemma: his three solutions are not the only options. In fact, they’re not even among the best options.

To “pay for our pensions” Americans do not need entitlement reform, a higher workforce participation rate, nor do we need especially high rates of immigration. What we need is economic growth—real, sustained, economic growth, the sort that’s driven by the invention and adoption of better technology.

Unlike immigration, which grows the economy in a linear way, technology can result in exponential growth. Consider the Industrial Revolution: Edmund Cartwright’s power loom increased the productivity of British textile weavers by a multiple of 40. To grow the economy an equal amount via immigration, Britain would have needed to import 39 additional weavers for every British weaver. Clearly technology is the better option—and yet Cassidy argues in favor of immigration.

If you want a contemporary example, just look at Japan. Japan has an aging population—it’s even older than America’s. And yet, Japan has no intention of opening its borders to mass immigration. Instead, the Japanese are investing heavily in technology and infrastructure that is designed to make Japan more productive rather than more populous. So far, it’s worked. Consider that despite Japan’s demographic crunch, their economy grew faster than America’s over the last 40 years (when measured on a per person basis). Technology grows the economy, not immigration.

If we want to save America’s welfare state—and that’s a big if—we need to restrict immigration and expand the economy. Everything else is just rhetoric.

Photo Credit: Tom Williams/CQ Roll Call

About the Author:

Spencer P. Morrison
Spencer P. Morrison is a writer and author of Bobbins, Not Gold. He is the editor-in-chief of the National Economics Editorial. Follow him on Twitter @SPMorrison_.