April 21 (Bloomberg) — Over the weekend neo-Nazis in Los Angeles were out protesting against immigration. Some in the Republican Party also are hostile to immigration, while much of the rest of the country doesn't view the issue as a priority.
With youth unemployment at 25 percent, voters wonder if there will be enough jobs to go around in future. There is also a concern that the country needs all the energy it has to start up its own engine. Entitlement obligations are moving from troubling to apocalyptic. The default American view is that expanding immigration can come only after we overcome economic sluggishness and the entitlements logjam. That is to say, never.
Immigration, though, has the capacity to be part of the solution. Especially when it comes to Social Security. But this is true if, and only if, reform is crafted right. Republicans are dying to be able to say they avoided raising taxes in this crisis. So they should start looking at immigration more seriously. For hard as it is to believe, immigration might be the key to bringing Social Security into balance without raising taxes.
This marvel of a fix is a two-part overhaul that starts not with visas but with Social Security's benefits formula. Scheduled benefits are so high that the present value of the program's unfunded obligations runs into the trillions of dollars.
The Social Security Administration now counts about 1 million net new immigrants that come into its system each year. Simply bringing in more to change the demography won't necessarily alter this situation in the long run. More immigration might even make the shortfalls worse.
That's so for two reasons. Immigrants tend to be lower earners, and the Social Security system pays lower earners more in benefits relative to their contribution than it does top earners. Benefits for all seniors also are pegged to real increases in the average wage and inflation. When the economy grows, the pensions for new cohorts actually get bigger.
The first move therefore would be to rejigger the formula for retirees' base pensions by indexing benefits to the consumer price index alone. A younger worker with the same career path as his older brother would get the same benefits as that brother, increased for inflation. He wouldn't get — as he currently does — a higher real pension than his sibling. A simple CPI index for all Social Security benefits would narrow the system's shortfalls to insignificant levels.
For decades now, AARP and other lobbyists have blocked this change by slamming the reduction in benefit increases as a regressive cut. But Social Security scholars have already come up with a compromise — so-called progressive indexing. Under progressive indexing, the government would index benefits of higher earners to inflation exclusively. But those at the bottom of the income scale would get to keep the more-generous benefits due to them under the current program.
The trouble with this politically astute compromise is that it costs more than pegging every base pension to the CPI, and therefore still leaves Social Security in deficit.
Here's where demography morphs to friend from enemy. Suppose we adopt the partial fix above. At the same time, the government hands out hundreds of thousands of green cards to skilled workers, the sort of talent that companies such as Microsoft, Wipro, Intel and Infosys sponsor.
Make the rules for receiving those visas liberal enough that immigrants can get them with minimum hassle and can, eventually, become citizens. Since these skilled immigrants will earn more than the average immigrant, or even the average worker, they will pay more payroll taxes.
That will help replenish Social Security's coffers short-term. The immigrants' benefits also would be calculated under the new inflation-indexed formula. That means these immigrants won't weigh down the system in the long term, either.
Back in Balance
Taken together, these measures would put Social Security in balance.
Skilled immigrants can add value in another way. Policy wonks from the Brookings Institution to the Heritage Foundation have long talked of the challenge of sustaining America as an opportunity society. Even more than most natives, immigrants have demonstrated their dedication to that ideal. Mixing a significant number of skilled nerds into the economy may subtly change U.S. work culture and energize other workers.
If forcing our young to compete with credentialed outsiders sounds Darwinian, remember that that's exactly what parents do when they tell their child he must attend the toughest college that admits him. Competition brings out the best in people.
Something for Everyone
The idea sketched out above has something in it to offend just about everyone.
The unions will argue that expanding immigration will give us higher unemployment. The plan's bias toward skilled workers will be deemed elitist, or worse. Democrats may well attack it as a plot to increase the number of Republicans, since workers with higher incomes tend to lean to the GOP. Immigration think tanks will bemoan the abandonment of the family-reunification principle. Others will warn that terrorists will get the visas.
The critics won't necessarily gain traction, precisely because the country is desperate this time. As an alternative to enormous tax increases, welcoming a new crop of engineers starts to look acceptable. If there can be a game change in health care, there can be one in immigration, too.
(Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)
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