Why The GOP's Anti-Immigration Folly Is Fiscally Fatal, Part 1

The actuarial deficit of Social Security/Medicare (OASDHI) is in the range of $55 trillion on a NPV basis and even in the world of big numbers that's downright daunting. Therefore we have long felt---and not entirely facetiously-----that the only way to avoid  fiscal catastrophe is to annex Mexico.

After all, the average age of its 128 millions citizens is just 26 years, meaning that there are lots of Tax Mules south of the border to bailout America's rapidly aging wave of Baby Boomers. And there is truly no way to describe the latter except to call it a demographic tsunami: The 50 million Americans 65 and older today will become 80 million by 2035 and eventually 105 million.

So not withstanding the impracticality of annexing Mexico, here begins a tale of labor force demographics, immigration and the fiscal Ponzi embedded in the social insurance system (Medicare and Social Security). It reveals the utter folly of the GOP's virtual war on immigrants and pales into insignificance this week's Washington contretemps about Dreamers, Walls and shit-holes. It shows that America needs to be importing immigrant workers, not deporting them.

As we see it, there is no conceivable level of tax increases or benefit cuts that can cope with the prospective doubling of the beneficiary rolls (see chart below). At least not in the context of what America's politicians and public believe to be a sacrosanct inter-generational transfer payment system, which incorporates virtually 100% of annual labor productivity into an endlessly rising level of real benefits over time.

We are referring here to the issue of "wage-indexing" versus "price-indexing" of each worker's earnings history. Since benefits are determined by averaging a worker's 35 best years of earnings, which are then indexed to age 60, it matters mightily whether each year's earnings are indexed for price inflation of say 2% per year or wage growth of say 4% annually during a beneficiary's working lifetime.

Take the case of a 20-year old earning $50,000 in 2020 and having that amount indexed to the year 2060 for his benefit formula calculation. The 2060 value would be worth $110,000 on a purely price-indexed (2%) basis, but $242,000 on a wage-indexed (4%) basis.

Self-evidently, the long-run cost of the system is being massively swollen by wage-indexing, but even then there is a hidden predicate that throws the equation into a cocked-hat. Namely, the worker in our example would have had $7,650 of payroll taxes (employer/employee) extracted in 2020 (15.3% of wages). But unless those taxes were put in Al Gore's infamous Social Security "lock-box" and earned 4% per year for the next 40 years there is obviously no way that the system can stay solvent.

Alas, the nation's vaunted "social insurance" system has nothing to do with insurance. There is no investment committee ala Met Life putting the payroll tax receipts to work in stocks, bonds, real estate, alternate asset classes, etc. Instead, there are dozens of Congressional spending committees allocating every single dime of payroll taxes to the current good works and boongoogles of the Federal government, as the case may be.

So it's pay-as-you-go, not insurance.

During the first 70 years of the system, the payroll tax did generate more cash inflow each year than the outgo for benefits and administrative costs. But those surpluses were not invested; they were spent on aircraft carriers, education grants, farm subsidies, civil service salaries and anything else financed by the general fund. Accordingly, the $2.8 trillion of purported cumulative surpluses and assets of the OASDHI system are really nothing more than accounting confetti.

Since 2009 it's gotten far worse. The system is now running a considerable cash deficit----$62 billion in 2016 alone---and is already insolvent, save for the phony book-keeping exercise under which that the $2.8 trillion pile of accounting confetti is being drawn down to cover the shortfall.

So forget the trust fund accounting hocus pocus and get right to the lick log. To wit, the so-called social insurance system is built on the assumption of a permanently expanding labor force, world without end. That's the only way that pay-as-you go taxes on $50,000 of wages in 2020 could square with benefits based on those same earnings indexed up to $242,000 in 2060.

Stated differently, you can't in any way, shape or form "grow" your way out of the wage indexing doom-loop built into the social insurance system. If economic growth over the next 40 years stems from more workers and labor hours, for instance, you will have more benefit claimants at the end of the road.

By the same token, if economic growth over this period is based on prodigious productivity, these gains will eventually result in higher wages and therefore a higher indexing factor in 2060 and higher real benefits upon retirement.

In other words, the so-called social insurance programs are on a giant fiscal treadmill. When you propose to pay benefits to our hypothetical worker at retirement in say 2068 (at age 68) based on cumulative labor productivity through 2060 versus the taxes paid on much lower actual wages (pre-indexed) decades earlier, which were completely spent the day they come into the door at the US treasury, the implication isn't hard to figure.

Namely, you will need tens of millions of new workers by 2068 to fund the huge inter-temporal gap. That's just another way of saying, of course, that Social Security/Medicare as now structured is the greatest Ponzi scheme ever invented.

Needless to say, your editor didn't discover this daunting math last week. Indeed, as a young GOP staffer on Capitol Hill in 1972 when Nixon loudly signed into law wage indexing on the eve of his election landslide that year, we even wrote a memo about the mathematical unsustainability of wage-indexing over the long-haul.

Yet given that the working age labor force (25-64) grew by nearly 21 million during the 1975-1985 decade (or peak of the baby boom labor force entry), the Ponzi seemed well enough supplied with new tax mules. Indeed, no politicians---GOP or Dem----operating on a two-year election cycle got very excited about a 75 year demographic cycle that went all pear-shaped at the far end.

By the early 1980s, of course, the crashing US birth rate suggested trouble ahead, which is one of the reasons we championed a package of social security reforms in the Reagan White House. These crucial reforms curtailed early retirement and replaced wage-indexing with price-indexing, among numerous other cost-savings changes.

To be sure, even that didn't solve the inherent actuarial fraud of social insurance, but it did sharply reduce the long-run cost of the system, thereby making a start on the emerging demographic/fiscal bust. During the 1985-1995 decade, for example, the prime-age labor force grew by 20 million again, but demographics were already faltering.

Only 15 million of these new tax mules were from native born families---meaning that immigration accounted for the other 5 million. And during the 1995-2005 decade the trend became undeniable. There were only 10.6 million new native born workers; the rest were immigrants.

At that stage of the game, however, the GOP's anti-immigrant caucus was still in its relative infancy. So there was no evident breach in the Ponzi: 20 million new taxpayers were being drafted into service each decade---even if a rapidly rising (and ignored) share were immigrants.

By contrast, the GOP rank and file on Capitol Hill, which was OK with trimming food stamps for poor people around the edges, was not about to take-on early retirement (at age 62) and wage-indexing--even though these were the overwhelming driver of Welfare State expansion and long-run fiscal doom.

In fact, in May 1981 the GOP Senate leadership passed a resolution denouncing these changes by a vote of 96 for, 0 against and 4 gone fishing. Even when the Greenspan bipartisan commission endorsed a social security system bailout in 1983, it essentially consisted of payroll tax increases, marginal benefit reforms and drafting state and local employees into the system on a one-time basis. The long-run doom loop of wage-indexing stayed in place.

Actually, the latter has turned out to be even more problematic than was feared at the time. That's because the system is actually double wage-indexed, and is also steeply progressive. By the latter we mean that the "replacement rate" for a worker's average indexed wages is 90% for the first $10,700 of annual wages but only 15% for any wages above $64,800 per year.

The passage below explains how this all works out, but the bottom line is that a retiree with life-time average earnings at today's Federal minimum wage ($15,000) would have a replacement rate of 76% on his so-called AIME ( average indexed monthly earnings). By contrast, a retirees with $100,000 of annual earnings would have a replacement rate of just 36%.

As explained below, this progressive schedule of benefit calculation (primary insurance amount) derives from descending replacement brackets (called "bend points"), where the wage replacement factor drops from 90% to 32% and then to 15% on wages above $64,800.

Yet the "bend points" are also wage indexed. That is, over time the full gain in labor productivity gets indexed into both the worker's wage record and the bend points, too, thereby putting more and more of a worker's lifetime earnings in the 90% and 32% replacement brackets.

A person's initial Social Security benefit is determined by a two-step process.  First, the worker's highest 35 years of earnings are indexed to wage growth, up to the year the worker reaches age 60, and then averaged.  This amount is divided by 12 to determine the average indexed monthly earnings (AIME) . Second, the Social Security benefit formula is applied to the worker's average indexed monthly earnings to determine the primary insurance amount (PIA) . A worker retiring at the normal retirement age in 2018 will receive:

  • 90 percent of the first $895 of AIME, plus
  • 32 percent of AIME over $895 through $5,397, plus
  • 15 percent of AIME above $5,397

This formula is designed so that low-income workers receive a higher percentage of their pre-retirement income than do average- and middle-income workers. In addition, by annually adjusting the bend points---the dollar amounts in the formula---to reflect wage inflation, the replacement rates for workers with comparable earnings histories stay the same.

The festering new problem that has emerged, however, is that the US economy has stopped producing breadwinner jobs, which generate lifetime earnings that mostly fall in the 32% and 15% replacement category. Again last month despite all the ballyhoo about full employment, the 72.9 million Breadwinner jobs reported by the BLS was essentially the same number as the 72.7 million reported during the month Bill Clinton was packing his bags to vacate the White House.

By contrast, since the turn of the century there has been a healthy growth in what we call the Part-Time Economy---jobs where workers clock only about 26 hours per week at $14 per hour. Here the job count is up by 18%, but, of course, these are only two-fifth jobs in an income sense because average annualized pay is just $20,000 compared to $50,000 for breadwinner jobs.

Needless to say, this is a serious problem in the here and now for workers and families struggling to make ends meet. But for the demographic/fiscal trap of social insurance it is fatal.

Based on the actual wage dynamics of the US economy since the turn of the century, the weighted average wage replacement rate is steadily rising. This means, in turn, that the system is hurtling toward insolvency all the faster.

But even minimum wages are better than no wages, and that gets to the giant skunk in the woodpile. During the decade between 2005 and 2015, the prime age labor force grew by only 13.3 million, meaning that the Ponzi is now visibly fading. Moreover, only 4.8 million of those new workers were from native born households. For the first time, in fact, upwards of 64% of the growth in the US labor pool during that period consisted of immigrants or workers born into families of immigrants.

The actual facts of the last decade ought to be enough to sober up the GOP calamity-howlers who simultaneously denounce the national debt and massive social insurance insolvency, but also want to put the kibosh on immigrants.

It's now plain as day that the social insurance Ponzi is already totally dependent upon immigrant labor for survival.

But as the say on late night TV, there's more. The thing about demographics is that they are baked into the cake. And what's baked into the cake about the native-born work force is that the very concept of "growth" is over and done----and as far as the demographer's eye can see.

To wit, during the decade between 2015 and 2025 the native born prime age work force will shrink by 4.3 million. The only thing keeping the total work force above the flat line is immigrant workers. Even then, with the 9.2 million gain over the decade in immigrant workers, the net gain for the total labor force will be just 4.9 million of prime-age workers.

So the Ponzi scheme is now unequivocally heading for the rocks. Compared to the workforce gain of 21 million during the decade after wage-indexing was adopted in 1972, we are now down to just 4.9 million gain in the current decade and roughly the same number during the 2025-2035 decade----all of whom are accounted for by immigrants and then some.

In that context, we are quite confident that the GOP anti-immigrant caucus has never looked at the graph below. To wit, without immigrant workers the prime working age population of 173 million in 2015 would shrink to just 166 million by 2035.

That is to say, you need upwards of 20 million new workers per decade in order to sustain the Ponzi. Today's Republican clowns would apparently prefer to blow the system sky-high rather than recognize this cardinal fact.

Without future immigrants, working-age population in U.S. would decrease by 2035

The fact is, native-born Americans haven't been making enough babies and future workers for a long time. The native-born fertility rate is currently just 1.7 per child bearing female, meaning that the native born work force is unequivocally on the downside of the slope. As shown below, the number of babies from native-born mothers in 2014 was 10% below where it was back in 1970---right before Washington so blithely incorporated wage-indexing into the system.

Even if Washington were  now to suddenly adopt a giant baby subsidy program to increase family size, it wouldn't materially impact the labor force demographics until 2050 or beyond. And by then, the system would have already crashed.

Births to immigrant moms tripled since 1970

In sum, the Trump/GOP anti-immigrant campaign amounts to administering last rites to the nation's social insurance Ponzi, which is listing badly already based on total demographics. If we use a generous projection of immigrant worker growth the labor force is still hitting the flat-line in the decades ahead---even as the inherent social insurance Ponzi requires an endless rise from the lower left to the upper right on the work force chart below.

Indeed, there is only one way at this late date in the actuarial drama to avoid a crash landing. That is, a national policy of obtaining already-made babies (working age immigrants) to goose the size of the prospective work force dramatically during the next thirty years as the baby-boom ages out and the baby-bust shrinks the native-born work force.

In that context, the very thought of deporting the Dreamers is ludicrous. Each one of the 800,000 represents potential life-time payroll taxes of upwards of $300,000. And even if those new tax mules do not ultimately pay for themselves----since few do under Social Security/Medicare combined----they would dramatically ease the fiscal crunch during 2020-2050 when the baby-boom benefit cost hits its maximum.

In fact, immigration policy should be about importing, not deporting, working age persons. And that could be accomplished in a heart-beat by adopting a guest-worker program with a long-term path to citizenship based on cumulative tax contributions over several decades.

Unfortunately, the GOP immigrant thumpers have created an utterly false narrative over the years about immigrant based crime and economic harm to domestic workers. In Part 2 we will address the GOP's big lies and risible mis-directions about the so-called border problem-----hoary myths that the Donald's rank demoguery and bile about rapists, murders, criminals and drugs has only made all the more insidious.

Immigrants and their U.S.-born children expected to drive growth in U.S. labor force

Needless to say, the already dire outlook for the social insurance system would be dramatically worse, save for the projected increase of 20 million immigrant tax-mules over the 20-years between 2015 and 2035. So put the GOP's irrationally restrictionist immigration policies in place and there would be only one possibly outcome: A crisis that is already barreling down the road for the 2030s would be turned into a calamity in the 2020s.

Image result for images of social security's growing cash deficit

 

 

 

 

 

 

 

 

 

 

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