Immigration policy has become a hornets’ nest. President George Bush’s pledge to “secure the borders” and resolve the problem of illegal workers has received mixed reviews. Congressional efforts to liberalize immigration rules have stirred controversy, and a new Heritage Foundation study has raised the hackles of immigration opponents.
The debate about illegal Mexican migrants overlooks a much bigger problem, one that threatens the viability of such government insurance programs as Social Security and Medicare. It’s a problem that indeed will stretch the economy’s ability to provide for a rapidly growing elderly population. The U.S. is facing a progressive shortage of persons of working age as baby boomers, born between 1946 and 1964, pass into their golden years. The first boomers will turn 65 in less than five years.
The problem stems from this post-World War II generation’s failure to procreate at a replacement rate. As a result, the ratio of working-aged Americans to those 65 and older is shrinking. For the first time in the nation’s history, the number of elderly is approaching the number of youngsters. Come 2030, for instance, the U.S. Census Bureau estimates there will be about 95.1 million persons 19 years of age and younger versus some 71.5 million persons 65 years and older.
More important, the ratio of working-aged persons in the U.S. to those aged 65 and over is slated to decline from the current 4.7:1 to 3.5:1 by 2030 and 2.6:1 by 2040 because of the demographic bulge caused by baby boomers. How is the economy going to manage with so few workers per retiree? (The Census Bureau data, incidentally, already include an immigration component based on current law.)
In their recently published annual report, Social Security and Medicare trustees warned that the trust funds face exhaustion, meaning they won’t be able to meet their financial obligations fully. By 2040, for instance, Social Security will be able to pay only 74 percent of its promised benefits. By 2018, Medicare will be able to pay just 80 percent of its estimated expenses. The following chart depicts the downward slopes in the trust funds for Old-Age and Survivors Insurance (OASI), Disability Insurance (DI), and Medicare’s Hospital Insurance (HI) as percentages of projected expenditures.
While it’s too late to change the boomers’ baby-making habits, policymakers can do the next best thing: that is, import as adults via liberalized immigration policies the children who were never born. Working-aged immigrants would do just as nicely as native-born Americans in terms of maintaining a viable ratio of workers to retirees.
Here, a new Heritage Foundation analysis proves useful. It assesses the effects of the Comprehensive Immigration Reform Act (CIRA, S.2611), cosponsored by senators Chuck Hagel (R., Neb.) and Mel Martinez (R., Fla), based on a variety of scenarios. Taking the 20 percent maximum annual growth in “guest workers” permitted under the bill, the study reckons the net increase in immigrant workers would be about 60.7 million persons over the next two decades, excluding both dependents and the 19 million permanent-residence visas authorized under current law.
The estimated 60.7 million new guest workers under the Hagel-Martinez bill would still fall short of the 109.1 million people in the 20-to-64 age bracket needed by 2026 to maintain the current 4.7:1 ratio of working aged persons to Americans 65 and older. An additional 41 million people would be needed by 2026 to keep the worker-to-elder ratio at its current level. This could be achieved by increasing the number of permanent-residence visas authorized by law. Currently, around 950,000 visas are issued each year.
The 4.7:1 ratio is, of course, an arbitrary figure, used merely to gauge the relative need for additional workers going forward. A lower ratio might serve equally as well if it were accompanied by a sizeable increase in labor productivity — i.e., the ability to do more, make more, and earn more with less labor. New inputs of financial capital would be required to purchase the necessary equipment and technology to accomplish this. It’s doable, of course, but it would require an increase in financial capital availability. This could best be accomplished through a revision of the federal tax code that would let taxpayers keep more of what they earn, thereby increasing both investment and consumption. A flat-rate income tax would be the best vehicle.
A 4:1 ratio of working age persons to persons 65 and older might in fact be optimal. Between now and 2025, the U.S. would need an additional 57.5 million adults to maintain a 4:1 ratio, averaging 3 million additional working-age persons per year over the next nineteen years. This would be equivalent to a 16.4 percent increase in the U.S. population over and above what is already projected by the Census Bureau — or an additional annual average population increase of less than 1 percent a year. The current Census Bureau forecast puts the population at around 350 million in 2025.
The added 57.7 million are working-age persons, so spouses are included but not children. However, in nineteen years, the first of their children born in the U.S. would begin entering the ranks of the working-age population, meaning little or no additional topping off would likely be needed after 2025, assuming the new immigrants procreate at a replacement rate of 2.1 per couple or better. In twenty years, authorities would surely want to reassess the situation. But the demographics ought to be pretty much in balance and the country would be past the baby boom bulge.
The best way, in sum, to deal with the consequences of baby boomer retirement on both the economy and the fisc would be a combination of immigration and tax reform that would increase the number of working-aged persons in the U.S. through liberalized immigration policies and also enhance labor productivity through greater private domestic capital expenditure. More people working more efficiently is the ultimate solution to the nation’s looming economic, fiscal, and demographic difficulties.
– William P. Kucewicz is editor of GeoInvestor.com and a former editorial board member of the Wall Street Journal.