Guest Workers and Social Security Solvency

Eduardo Porter’s New York Times article entitled Illegal Immigrants Are Bolstering Social Security With Billions describes how one Mexican citizen – along with perhaps seven million other “illegal immigrant” workers:

are now providing the system with a subsidy of as much as $7 billion a year … Most immigration helps Social Security’s finances, because new immigrants tend to be of working age and contribute more than they take from the system. A simulation by Social Security’s actuaries found that if net immigration ran at 1.3 million a year instead of the 900,000 in their central assumption, the system’s 75-year funding gap would narrow to 1.67 percent of total payroll, from 1.92 percent – savings that come out to half a trillion dollars, valued in today’s money. Illegal immigrants help even more because they will never collect benefits. According to Mr. Goss, without the flow of payroll taxes from wages in the suspense file, the system’s long-term funding hole over 75 years would be 10 percent deeper.

I have never liked the term “illegal alien”. I guess my Libertarian streak would have me use the term “guest workers” with “legal alien” being guest workers that file the necessary forms for the bureaucracy and “illegal” simply referring to those who don’t file the paperwork. I was once a guest worker in Ireland during a period of high local unemployment – where the citizens treated me quite well – even if I paid into their Social Security equivalent without compensation upon returning to the land of baseball.

Let’s note one of the critiques of the Baker-DeLong-Krugman paper from Greg Mankiw:

With the rest of the world, such as China and India, growing so rapidly, U.S. companies will increasingly find profitable opportunities abroad. At the same time, foreigners will increasingly invest in U.S. companies, which will be among the driving forces behind global growth. Under this scenario, an increasing share of the earnings of U.S. corporations could come from abroad, without any obvious implications for the U.S. current account.

Simply put – even if the capital to labor ratio for the U.S. rises over the next 75 years, Mankiw is noting that the rest of the world might stay relatively labor abundant and capital scarce. Trade theory teaches us there are two basic routes to factor price equalization: free flow of goods and free flow of factors of production. Mankiw chooses to emphasize capital mobility, but what about labor mobility? If labor migrates from abroad to the U.S., then the pessimism as to Social Security solvency may be misplaced.

Some American workers might protest that the U.S. labor market is not at full employment. I agree but the blame for this short-run aggregate demand problem lies at the doorstep of the White House and its lack of attention to designing better macroeconomic policies. Of course, this same White House preaches free trade, as it is about to impose new quotas on Chinese textile imports.