Immigration and America’s Aging ‘Time Bomb’

The Penn Wharton Budget Model has brought clarity to the immigration debate in the U.S. by analyzing macroeconomic implications of different policy scenarios. The model is at the center of a paper titled "Immigration and the Macroeconomy", which was written by experts from the PWBM.

Increasing legal immigration improves the government's fiscal balance and the economy on a per-capita basis, according to the paper.

The legalization plan the paper modeled is similar to the Biden immigration plan. That plan was similar to a one-shot legalization for people who are already in the U.S.

The study found that temporary increases in legal immigration rates lead to long-term fiscal benefits. The study said that legal immigration reduces the burden on younger workers to provide for older retirees. As the children of new immigrants enter the workforce, policies that make way for legal immigration produce long lasting, multi-generational effects.

The model looked at the likely effects of a 25% increase in legal immigration over the next six years. The policy could lead to an increase in per capita GDP of 0.05% by 2032 and 0.20% by 2052, it predicted. Government debt would be 0.41% lower by 2032 and 1.34% lower by 2052.

There is a trade-off between higher wages for newly legalized workers and increased government debt through additional spending on social programs for those same immigrants.

The model predicted that a policy of full legalization of illegal immigrants will lead to a 0.05% increase in government debt by 2032 and a 1.26% increase by 2052. In 2032 and 2052, per capita GDP is less than baseline.

70% of the immigrants who were offered legalization would choose it, according to the paper. Herrick said that others may be reluctant because of the costs involved and penalties they may have to pay for being in the country illegally.

There are dependency ratios for old-age.

The old-age dependency ratio is an overarching question in the immigration debate. The paper estimated that the U.S. population will increase to 356.5 million by 2040 with a foreign born share of 14.5%. The population will increase to 375.8 million by 2060, with the foreign born share rising slightly to 15.6%.

The average age of adults in the U.S. increased from 48.6 in 2020 to 51.7 in 2040 and 53.9 in 2060. The average immigrant adult in 2020 was 49 years old, compared to 48.6 years old for natives, according to the paper.

The paper pointed out that increased immigration reduces the old-age dependency ratio. Increased immigration increases the number of newborns because immigrants are younger and more likely to have a baby later in life.

The main finding of the study was thatImmigrants tend to arrive within a fairly consistent age band.

“Immigrants tend to arrive within a fairly consistent age band so you can see their lifecycle throughout the projection as the dependency increases and decreases.” –Austin Herrick

If you allow more immigrants to come into the country, your dependency rate will go down because immigrants are more likely to work. As their children enter the workforce in greater numbers, that drives the ratio back down.

The paper quantified the productivity boost that comes from legalized immigrants. The paper says thatolicies which increase immigration flow will relieve some of the burden on current younger workers in having to provide for older retirees only if immigrants provide a net growth to the economy.

Berkovich said that the magnitudes of the forces going in opposite directions matter a lot for the final effect. This paper was written to try to get a good estimate of these effects and see which way to go with immigration policy.

When unauthorized immigrants are legalized, they are more likely to stay in the country. As they get older, they will need the same social programs that citizens and legal immigrants get. These people are staying in the country longer than they would otherwise and that has a negative impact on the government's finances.

The value of immigration is shaped by labor productivity.

The macroeconomic value of immigration is determined by individual labor productivity. The authors wrote that higher labor productivity leads to higher income for those more productive individuals and higher revenue for the government.

When labor productivity increases, the return to capital also increases. The fiscal balance and the economy will be affected by additional immigrants until capital investment catches up.

“I expected the legalization policies to be more growth-inducing in the long run than they turned out to be [in the paper’s model], which was surprising to me.” –Efraim Berkovich

Berkovich said that unauthorized people become more productive when legalized. He explained that it may have to do with access to a wider range of jobs.

Berkovich said that immigration doesn't always provide a productivity boost. The demographic aging bomb is caused by the fact that the unauthorized immigrants who would have left the country before they collect Social Security now are legalized to stay.

The data from the Congressional Budget Office shows that unauthorized immigrants earned on average 48% less than citizens and lawful immigrants. 42% of unauthorized immigrants lack a high school degree, compared to 15% of authorized immigrants and 6% of citizens.

Even at each level of education, unauthorized immigrants had lower earnings than the other two groups. When legalization increases federal spending on Social Security and other welfare programs, the budget effect is partially offset by higher rates of tax compliance by the newly lawful immigrants, they said.

There are experiments in the study.

The researchers considered two different types of immigration policies in designing a framework to analyze multiple scenarios. They conducted experiments with five different scenarios.

1. Almost zero legal immigration: This policy reduces the expected baseline inflows by 99% for five years.
2. Half legal immigration: A reduction of 50% in the baseline inflow for five years.
3. A quarter more legal immigration: A 25% increase in the baseline inflow for five years.
4. Double legal immigration: A 100% larger immigration inflow for five years.
5. Quadruple legal immigration: A four times larger than baseline immigration inflow for five years.

Several outcomes from their experiments were identified by the researchers.

• Labor productivity increases slightly right after the legalization policy takes place because of the assumption that legal immigrants have access to formal labor markets and better work opportunities than unauthorized immigrants.
• After the discrete increase in productivity in the first 3-4 years after a legalization immigration policy, there is a decreasing trend with respect to baseline. Newly legalized immigrants are more likely to remain and, because they have a lower education achievement on average, the long-run available labor productivity per capita declines.
• When unauthorized immigrants gain legal status and their productivity rises due to the status change, output per capita goes up. Since legalized immigrants are less productive than the population average and are more likely to stay in the country, output per capita drops in the long-run.
• Unauthorized workers earn less than natives (mostly due to demographic characteristics, especially education). Legalization increases their propensity to remain in the country, thus decreasing per capita wage.
• Unauthorized immigrants are older than authorized immigrants or older than native born Americans. That goes against popular perceptions that legalization of unauthorized immigrants has significantly more fertility effects.

According to Berkovich, their framework will help policymakers to estimate the potential impacts of various immigration scenarios with more precision than existing models. He hoped the paper would lead to a discussion on the insights revealed by their model.