Testimony Prepared for the House Ways and Means Committee

July 26, 2006

Steven A. Camarota
Director of Research, Center for Immigration Studies

Summary
There is general agreement that the fiscal impact of immigration depends largely on the education level of the immigrants in question. Immigrants with a lot of education pay more in taxes than they use in services, while those with little education tend to have low incomes, pay relatively little in taxes and often use a good deal in public services. In the case of illegal alien, the vast majority have little education, and this is the key reason they create fiscal costs. Illegal families often receive benefits on behalf of their US-born children. As a general proposition, the large scale immigration of less-educated immigrants (legal or illegal) creates significant funding problems for social programs, including those for retirees, even though the immigrants work.

Key Findings of Research:
The Fiscal Impact of Immigration Generally

• The National Research Council (NRC)¹ estimated that immigrant households create a net fiscal burden (taxes paid minus services used) on all levels of government of $20.2 billion annually.
   

• The NRC estimated that an immigrant without a high school diploma will create a net lifetime burden of $89,000, an immigrant with only a high school education it is negative $31,000. However, an immigrant with education beyond high school is a fiscal benefit of $105,000.
   

• Estimating the impact of immigrants and their descendants, the NRC found that if today’s newcomers do as well as past generations, the average immigrant will be a fiscal drain for his first 22 years after arrival. It takes his children another 18 years to pay back this burden.
   

• The NRC also estimated that the average immigrant plus all his descendants over 300 years would create a fiscal benefit, expressed in today’s dollars of $80,000. Some immigration advocates have pointed to this 300-year figure, but the NRC states it would be “absurd” to do so.

Illegal Immigration

• The Center for Immigration Studies (CIS) estimates that in 2002 illegal alien households imposed costs of $26 billion on the federal government and paid $16 billion in federal taxes, creating an annual net fiscal deficit of $10.4 billion at the federal level, or $2,700 per household.²
   

• Among the largest costs, were Medicaid ($2.5 billion); treatment for the uninsured ($2.2 billion); food assistance programs such as food stamps, WIC, and free school lunches ($1.9 billion); the federal prison/court systems ($1.6 billion); and federal aid to schools ($1.4 billion).
   

• If illegal aliens were legalized and began to pay taxes and use services like households headed by legal immigrants with the same education levels, CIS estimates the annual net fiscal deficit would increase to $29 billion, or $7,700, per household.
   

•  The primary reason illegal aliens create a fiscal deficit is that an estimated 60 percent lack a high school degree and another 20 percent have no education beyond high school. The fiscal drain is not due to their legal status or unwillingness to work.
   

• Illegal alines with little education are a significant fiscal drain, but less-educated immigrants who are legal residents are a much larger fiscal problem because they are eligible for many more programs.
   

• Many of the costs associated with illegals aliens are due to their US-born children who have American citizenship. Thus, barring illegal aliens themselves from federal programs will have little impact on costs.
   

• Focusing just on Social Security and Medicare, CIS estimates that illegal households create a combined net benefit for these two programs in excess of $7 billion a year. However, they create a net deficit of $17 billion in the rest of the budget, for a total net federal cost of $10 billion.

Funding for Retirement Programs

• Immigration has only a very small impact on the aging of society because although immigrants arrive relatively young, and have higher fertility than natives, they age like everyone else, and the differences with natives are not large enough to fundamentally alter the nation’s age structure.
   

• In 2000 the average age of an immigrant was 39, which is actually about four years older than the average age of a native-born American.³
   

• If all post-1980 immigrants and all the children they have had are excluded from the 2000 Census, the working-age (15 to 64 years old) share of the population would be 65.9, almost exactly the same as the 66.2 percent when they are all included.
   

• Looking to the future, Census Bureau projections indicate that if net immigration averaged 100,000 to 200,000 annually, the working-age share would be 58.7 percent in 2060, if net immigration average roughly 900,000 to one million, it would be still be 59.5 percent.⁴
   

• The Social Security Administration (SAA) projections show that, net annual legal immigration of 800,000 a year over the next 75 years versus 350,000 a year would create a benefit equal to less than 1 percent of the program’s projected total expenditures.
   

• As for the program’s deficit, net annual legal immigration of 350,000 a year versus 800,000 would increase the dollar value of the actuarial deficit by just 6.6 percent over the next 75 years.
   

• It is not clear that even this small benefit exists, because SSA does not take into account the lower average earnings and resulting lower average tax payments of legal immigrants.
   

• SSA also does not consider the Earned Income Tax Credit (EITC), which is explicitly designed to give back Social Security tax payments to low-wage earners. Legal immigrants use the EITC at significantly higher rates than natives.
   

• If illegal aliens are legalized and began to receive the EITC at the same rate as legal immigrants with the same education, CIS estimates that costs for the Credit would increase 10-fold.⁵

Immigration’s impact on public coffers has long been at the center of the immigration debate. Until recently, however, we actually had very little reliable data on the subject. While there is still much that is not known, we now have some reasonably good information about this important topic. As I tried to make clear in the summary above, there is a pretty clear consensus that the fiscal impact of immigration depends on the education level of the immigrants. Certainly other factors also matter, but the human capital of immigrants, as economists like to refer to it, is clearly very important. There is no signal better predictor of one’s income, tax payments or use of public services in modern America than one’s education level. The vast majority of immigrants come as adults, and it should come as no surprise that the education they bring with them is a key determinate of their fiscal impact. It is simply not possible to fund social programs, including those for retirees, by bringing in large numbers of immigrants with relatively little education and resulting low incomes.

In my own research I have concentrated in two areas: the effect of illegal alines on the federal government and the impact of immigration more generally on the Social Security system. I can only briefly touch on these two topics in my testimony. For those wanting a more detailed look at these questions, my most recent publications are available online at the Center for Immigration Studies web site, www.cis.org. My most recent studies of these issues are, “The High Cost of Cheap Labor: Illegal Immigration and the Federal Budget” and “Immigration in an Aging Society: Workers, Birth Rates and Social Security.”

Illegal Immigrants and the Federal Budget
A good deal of research has focused on the effect illegal have on taxpayers at the state and local level. Much of this work has examined only costs, or only tax payments, but not both. In my work I have tried to estimated both, and I have focused on the federal government. In Based on a detailed analysis of Census Bureau data, my analysis indicates that households headed by illegal aliens imposed more than $26.3 billion in costs on the federal government in 2002 and paid $16 billion in taxes, creating a net fiscal deficit of almost $10.4 billion, or $2,700 per illegal household. The largest costs are Medicaid ($2.5 billion); treatment for the uninsured ($2.2 billion); food assistance programs such as food stamps, WIC, and free school lunches ($1.9 billion); the federal prison and court systems ($1.6 billion); and federal aid to schools ($1.4 billion).⁶

A Complex Fiscal Picture. While the net fiscal drain they create for the federal government is significant, I also found that the costs illegal households impose on federal coffers are less than half that of other households, but their tax payments are only one-fourth that of other households. Many of the costs associated with illegals are due to their American-born children, who are awarded U.S. citizenship at birth. Thus, greater efforts to bar illegals from federal programs will not reduce costs because their citizen children can continue to access them. It must also be remember that the vast majority of illegals hold jobs. Thus the fiscal deficit they create for the federal government is not the result of an unwillingness to work. In 2002, I found that 89 percent of illegal households had at least one person working compared to 78 percent of households headed by legal immigrants and natives.

Legalization Would Dramatically Grow Costs. One of my most important findings with regard to illegals aliens is that if they were given legal status and began to pay taxes and use services like households headed by legal immigrants with the same education levels, the estimated annual net fiscal deficit would increase from $2,700 per household to nearly $7,700, for a total net cost of $29 billion. Costs increase dramatically because less-educated immigrants with legal status — what most illegal aliens would become — can access government programs, but still tend to make very modest tax payments. Of course, I also found that their income would rise, as would their tax payment if legalized. I estimate that tax payments would increase 77 percent, but costs would rise by 118 percent.

These costs are considerable and should give anyone who advocates legalizing illegal immigrants serious pause. However, my findings show that many of the preconceived notions about the fiscal impact of illegal households turn out to be inaccurate. In terms of welfare use, receipt of cash assistance programs tends to be very low, while Medicaid use, though significant, is still less than for other households. Only use of food assistance programs is significantly higher than that of the rest of the population. Also, contrary to the perceptions that illegal aliens don't pay payroll taxes, we estimate that more than half of illegals work "on the books." On average, illegal households pay more than $4,200 a year in all forms of federal taxes. Unfortunately, they impose costs of $6,950 per household.

What’s Different About Today’s Immigration. It is worth noting that many native-born Americans observe that their ancestors came to America and did not place great demands on government services. Perhaps this is true, but the size and scope of government was dramatically smaller during the last great wave of immigration. Not just means-tested programs, but expenditures on everything from public schools to roads were only a fraction of what they are today. Thus, the arrival of immigrants with little education in the past did not have the negative fiscal implications that it does today. Moreover, the American economy has changed profoundly since the last great wave of immigration, with education now the key determinant of economic success. The costs that unskilled immigrants impose simply reflect the nature of the modern American economy and welfare state. It is doubtful that the fiscal costs can be avoided if our immigration policies remain unchanged.

Illegals and Federal Retirement Programs. As for Social Security and Medicare, our findings show that illegals have an unambiguously positive effect for these two programs. We estimate that illegal households create a combined net benefit for these two programs in excess of $7 billion a year, accounting for about 4 percent of the total annual surplus in these two programs. Unfortunately, they create a net drain of $17 billion in the rest of the federal budget, for a total net loss of more than $10 billion. Nonetheless, their impact on Social Security and Medicare is unquestionably positive. Of course, the benefit to these two programs stems from the fact that they are illegal. In the long run, legalization would be a significant problem for these two programs because it would add millions of low-wage earns to the system. Also, if the Social Security totalization agreement with Mexico goes into effect, which allows illegals to collect Social Security, the impact could be very negative for both programs as well.

Policy Options for Dealing With Illegal Immigration. The negative impact on the federal budget from illegal immigration need not be the only or even the primary consideration when deciding what to do about illegal immigration. But assuming that the fiscal status quo is unacceptable, there are three main changes in policy that might reduce or eliminate the fiscal costs of illegal immigration. One set of options is to allow illegal aliens to remain in the country, but attempt to reduce the costs they impose. A second set of options would be to grant them legal status as a way of increasing the taxes they pay. A third option would be to enforce the law and reduce the size of the illegal population and with it the costs of illegal immigration.

Let Illegal Stay Illegal, But Cut Costs. Reducing the costs illegals impose would probably be the most difficult because illegal households already impose only about 46 percent as much in costs on the federal government as other households. Moreover, the fact that benefits are often received on behalf of their U.S.-citizen children means that it is very difficult to prevent illegal households from accessing the programs they do. It seems almost certain that if illegals are allowed to remain in the country, the fiscal deficit will persist.

The High Cost of Legalization. As discussed above, our research shows that granting illegal aliens amnesty would dramatically increase tax revenue. Unfortunately, we also find that costs would increase even more. Costs would rise dramatically because illegals would be able to access many programs that are currently off limits to them. Moreover, even if legalized illegal aliens continued to be barred from using some means-tested programs, they would still be much more likely to sign their U.S.-citizen children up for them because they would lose whatever fear they had of the government. We know this because immigrants with legal status, who have the same education levels and resulting low incomes as illegal aliens, sign their U.S.-citizen children up for programs like Medicaid at higher rates than illegal aliens with U.S.-citizen children. In addition, direct costs for programs like the Earned Income Tax Credit would also grow dramatically with legalization. Right now, illegals need a Social Security number and have to file a tax return to get the credit. As a result, relatively few actually get it. We estimate that once legalized, payments to illegals under this program would grow more than ten-fold.

Enforcing the Law. If we are serious about avoiding the fiscal costs of illegal immigration, the only real option is to enforce the law and reduce the number of illegal aliens in the country. First, this would entail much greater efforts to police the nation's land and sea borders. At present, less than 2,000 agents are on duty at any one time on the Mexican and Canadian borders. Second, much greater effort must be made to ensure that those allowed into the country on a temporary basis, such as tourists and guest workers, are not likely to stay in the country permanently. Third, the centerpiece of any enforcement effort would be to enforce the ban on hiring illegal aliens. At present, the law is completely unenforced. Enforcement would require using existing databases to ensure that all new hires are authorized to work in the United States and levying heavy fines on businesses that knowingly employ illegal aliens.

Policing the border, enforcing the ban on hiring illegal aliens, denying temporary visas to those likely to remain permanently, and all the other things necessary to reduce illegal immigration will take time and cost money. However, since the cost of illegal immigration to the federal government alone is estimated at over $10 billion a year, significant resources could be devoted to enforcement efforts and still leave taxpayers with significant net savings. Enforcement not only has the advantage of reducing the costs of illegal immigration, it also is very popular with the general public. Nonetheless, policymakers can expect strong opposition from special interest groups, especially ethnic advocacy groups and those elements of the business community that do not want to invest in labor-saving devices and techniques or pay better salaries, but instead want access to large numbers of cheap, unskilled workers. If we choose to continue to not enforce the law or to grant illegals legal status, both the public and policymakers have to understand that there will be significant long-term costs for taxpayers.

Immigration and Federal Retirement Programs
Many advocates argue for high levels of immigration on the grounds that it can solve the problem of our aging population. Those that make this argument worry that there will not be enough working-age people to support the economy or pay for government, particularly retirement programs. Immigration, it is argued, will make the country more youthful. Almost all of those making this argument, however, are not demographers. Actual demographic analysis shows immigration can have only a very tiny effect on the nation’s age structure.

Basic Demographics. We can measure the impact of current immigration on the aging of the United States very precisely. The Census asks immigrants when they arrived. (Some 90 percent of illegal immigrants are thought to have responded to the 2000 Census.) If we excluded all immigrants, including illegals, who arrived after 1980 from the 2000 Census, the average age in the United States would have only been four months older. Another way to look at the aging of society is to examine the working-age (15 to 64) share of the population. Looking at the full impact of post-1980 immigrants reveals that if they and all their U.S.-born children are not counted, the working-age share would have been 65.9 percent in 2000, almost exactly the same as the 66.2 percent when they are all included. We can also look at fertility rates. In 2000 the average woman living in America had 2.1 children in her life time, compared to 1.4 for Europe. But if all immigrants are excluded the rate would still have been 2.0. The key to understanding why America has higher fertility than other industrialized democracies is not immigration. The relatively high US fertility is one of the key reasons immigration has such a small impact on the aging of American society. ⁷

Immigration’s Projected Impact on Aging. Looking to the future, Census Bureau projections indicate that if net immigration averaged 100,000 to 200,000 annually, the working- age share would be 58.7 percent in 2060, while if net immigration averaged 900,000 to one million, it would be 59.5 percent A 2000 report by Census Bureau states that immigration is a “highly inefficient” means for addressing the ratio of working-age people to the rest of the population in the long run. The argument that immigration can have a significant impact on the aging of our society may seem plausible. Immigrants tend to arrive in America relatively young and they also tend to have more children than natives. But an evaluation of the actual data shows that the difference between immigrants and natives is not sufficiently large, nor are immigrants sufficiently numerous to be of any real help in changing the nation’s age structure. Moreover immigrants age just like everyone else. Americans will simply have to look elsewhere to deal with this problem.⁸

Impact on Retirement Programs. Because, as pointed out above, immigration has little impact on the working-age share of the population, it follows that it will have only a very small impact on federally funded retirement programs. One can see this by looking at Social Security Administration (SSA) projections. The 2004 trustee’s report, along with other information provided to Senator Hagel, indicate that net annual legal immigration of 800,000 a year versus 350,000 a year would create a benefit equal to only 0.77 percent of the program’s projected total expenditures. As for the program’s deficit, annual legal immigration of 350,000 versus 800,000, would increase the dollar value of the actuarial deficit by just 6.6 percent of the projected deficit over the next 75 years. The bottom line is that even very large shifts in the number of people allowed into the country have only a minor impact on the program.⁹

Low-wage Workers Are a Problem for Social Security. It not even clear that the modest benefits estimated by the SSA from immigration actually exist. The SSA immigration projections do not account for the lower average income and resulting tax payments of legal immigrants. SSA basically assumes that legal immigrants will have average earnings from the moment they arrive, which is contrary to a large body of research. A 1998 study by the Urban Institute, which is generally regarded as a supporter of high immigration, found that legal immigrants in New York State paid only 85 percent as much in Social Security taxes as natives
on average. This also matters because Social Security is redistributive in nature, making somewhat more generous payments to lower-wage earners relative to their tax contributions, than to more affluent earners.

The lower income of immigrants also has implications for Earned Income Tax Credit (EITC), which as the IRS states on its web site, was partly created by Congress to “offset the burden of Social Security taxes” on low-wage workers. For example, a family of four (with two children) and earned income of $25,000 a year would received about $2,100 from the EITC in 2004, compared to Social Security tax payments of roughly $1,600, not including the employer contributions. The Center for Immigration Studies has estimated that households headed by legal immigrants received an average of $392 from the EITC in 2002 compared to $209 for native headed households. The SSA makes no attempt to adjust for the existence of the EITC in its projection, which are focused solely on Social Security. Even putting aside the EITC and the lower average earnings of immigrants, Census Bureau and SSA projection show that immigration of any kind can have only a modest impact on the aging of society and thus the Social Security system.

Conclusion
If you take nothing else away from my testimony, it should be remembered that it simply is not possible to fund social programs, including those for retirees, by bringing in large numbers of immigrants with relatively little education. This is central to the debate over illegal immigration debate because 60 percent of illegals are estimated to have not completed high school and another 20 have only a high school degree. The fiscal problem created by less-educated immigrants exists even though the vast majority of immigrants, including illegals, work and did not come to America to get welfare. The realities of the modern American economy coupled with the modern American administrative state make large fiscal costs an unavoidable problem of large scale less-educated immigration.

This fact does not reflect a moral defect on the part of immigrants. What it does mean is that we need an immigration policy that reflects the reality of modern America. We may decide to let illegals stay and we may even significantly increase the number of less-educated legal immigrants allowed into the country, which is what the immigration bill recently passed by the Senate would do. But we have to at least understand that such a policy will create large unavoidable costs for taxpayers.

 End Notes

¹ The National Research Council’s 1997 is report entitled, The New Americans: Economic, Demographic, and Fiscal Effects of Immigration. A summary of the report’s findings can be found at www.cis.org/articles/1999/combinednrc.pdf .

² These estimates and those that follow dealing with illegal immigration come a Center for Immigration Studies report entitled, The High Cost of Cheap Labor: Illegal Immigration and the Federal Budget. The Report can be found online at www.cis.org/articles/2004/fiscal.pdf .

³ These figures and those that follow dealing with the Social Security system can be found in a Center for Immigration Studies report, entitled, Immigration in an Aging Society: Workers, Birth Rates, and Social Security, which is available online at: www.cis.org/articles/2005/back505.pdf . The data for the Center’s Social Security study comes from the 2004 trustee’s report which can be found online at: www.socialsecurity.gov/OACT/TR/TR04/index.html  and from additional data provide by the SSA to Senators Chuck Hagel, which can be found online at: www.nfap.net/researchactivities/studies/Appendix1toSocialSecurityStudy.pdf.

⁴ The Census Bureau’s population estimates from 2000 can be found at www.census.gov/population/www/documentation/twps0038.pdf. Table E on page 28 reports the different net immigration assumptions and Table F on page 29 reports the impact of these assumptions on the dependency ratio.

⁵ See footnote 2.

⁶ See footnote 2 for the source of this information and all information dealing with the fiscal costs of illegal immigration on the federal budget.

⁷ See footnote 3 for the source of information dealing with the impact of immigration on demographics in the United States and the Social Security system.

⁸ See footnote 3.

⁹ See footnote 3.