Why The GOP’s Anti-Immigration Folly Is Fiscally Fatal

Why The GOP’s Anti-Immigration Folly Is Fiscally Fatal by David Stockman – Contra Corner

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.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.