Figure 1 included. IMMIGRANTS AND THE PUBLIC COFFERS Julian L. Simon But Rep. Lamar Smith (R., Texas), chairman of the immigration subcommittee and author of the legislation, defended the measure, saying some legal immigrants "live at taxpayers' expense" on a Social Security welfare program. (Wall Street Journal, October 12, 1995, p.A8) Even those who are pro-immigration have now come to believe that government expenditures on recent immigrants are greater than expenditures on natives. But this assertion is false - massively. True, expenditures commonly called "welfare" are about $150 per year greater per immigrant than per native. In- deed, they always have been higher. But these welfare expendi- tures are only a drop in the bucket of total government social outlays on both groups. The relevant totals are roughly $3800 for natives, and roughly $2200 for immigrants. The narrowly- defined welfare expenditures on immigrants are a very red herring in policy debate. From census and federal administrative data Rebecca Clark of the Urban Institute calculated expenditures for immigrants and natives on Aid to Families with Dependent Children (AFDC), food stamps, Supplemental Security Income (SSI) and General Assistance. Foreign-born persons taken altogether have perhaps a page 1 article5 immcstsz November 9, 1995 Figure 1 included. Note: The organizations who have joined their names to Immigration: Demographic and Economic Facts are not associated with this short article. Unlike the other purely-factual material in Facts, this article presents economic analysis, and necessarily contains some specu- lative assumptions. Hence it should be considered the sole responsibility of the author. IMMIGRANTS AND THE PUBLIC COFFERS Julian L. Simon But Rep. Lamar Smith (R., Texas), chairman of the immigration subcommittee and author of the legislation, defended the measure, saying some legal immigrants "live at taxpayers' expense" on a Social Security welfare program. (Wall Street Journal, October 12, 1995, p.A8) Even those who are pro-immigration have now come to believe that government expenditures on recent immigrants are greater than expenditures on natives. But this assertion is false - massively. True, expenditures commonly called "welfare" are about $150 per year greater per immigrant than per native. In- deed, they always have been higher. But these welfare expendi- tures are only a drop in the bucket of total government social outlays on both groups. The relevant totals are roughly $3800 for natives, and roughly $2200 for immigrants. The narrowly- defined welfare expenditures on immigrants are a very red herring in policy debate. From census and federal administrative data Rebecca Clark of the Urban Institute calculated expenditures for immigrants and natives on Aid to Families with Dependent Children (AFDC), food stamps, Supplemental Security Income (SSI) and General Assistance. Foreign-born persons taken altogether have perhaps a 15 percent higher probability of obtaining these goods and services than do natives. From her data I estimate that federal expenditures average $404 per year per immigrant, while the average native receives $260. These data for the early 1990s are shown at the base of the immigrant and native graph columns in Figure 1. Figure 1 here Greater use of welfare by immigrants than by natives is an old story, however. As of 1975 the Census Bureau's authoritative Survey of Income and Education showed that immigrants had higher welfare receipts than natives. And it was also true in the first decade of the century, according to a federal commission on immigration. The key point: The data on the four federal welfare pro- grams mentioned above do not include most government payments to the elderly, or expenditures for local public schooling. One must include those large categories to reach sound conclusions about total government expenditures on various cohorts of immi- grants and natives. Social Security and Medicare, by far the most expensive government transfer programs, are paid mainly to natives. This is because immigrants typically arrive when they are young and healthy, and also because older recent immigrants do not qualify for Social Security. Expenditures on immigrants for Social Security and Medicare are particularly difficult to estimate because the payments differ greatly among age groups. And the sizes of the various age groups of foreign-born residents differ greatly because of the deaths of older immigrants and the increasing rates of immi- gration in recent years. Nevertheless, I shall make rough esti- mates for arrivals since about 1970. Then I will explain why data for aged immigrants who arrived earlier are not relevant here. Schooling costs estimated by Ms. Clark imply $522 per capita for immigrants, and $922 per capita for natives. The expendi- tures are lower for the immigrant population because the propor- tion of children among the total immigrant population is smaller than among the total native population. (Separate data for recent cohorts probably would show higher immigrant expenditures.) In light of other data, however, I think the schooling costs estimated by Clark are too low, though I do not doubt that her calculations are correct. I consider that it is more sensible to think of schooling costs for immigrants as being closer to those of natives than Clark's calculations imply; both estimates are shown in the graph. For unemployment compensation we can safely assume similar expenditures of $138 per capita for immigrants and natives, based on experience with unemployment compensation in the 1970s. For Medicaid it is reasonable to assume higher expenditures for immigrants than for natives in the same proportion as for the welfare programs above, to reflect immigrants being somewhat poorer on average than natives. Federal and state Medicaid expenditures are about $90 billion and $70 billion respectively, so expenditures per person are perhaps $627 for natives and $752 for immigrants. Total federal expenditures of $305 billion in 1992 for Social Security and $133 billion for Medicare (arbitrarily re- duced by 2 percent for payments to immigrants) indicate expendi- tures per native of $1305 and $566 respectively. The authorita- tive 1975 SIE survey data suggest that the average receipt per immigrant who arrived within the past 25 years is less than a fifth of the average expenditure per native - say $261 and $113 respectively, for argument. (Some allowance for the public support of the immigrant aged is embodied in the relatively heavy SSI payments that substitute for Social Security.) In the graph, these old-age programs dwarf welfare programs. Now we can add together all transfer payments plus schooling costs. This is the appropriate measure of government expendi- tures to use in any assessment of the costs and benefits of immi- gration. The graph shows that the expenditures on natives per capita are much greater than the expenditures on immigrants per capita - roughly $3800 versus $2200. For immigrants who arrived 1970-1990, the total might be $100 higher due to higher schooling costs. It is quite astonishing that the estimates for natives are so much higher than those for natives. The gap derives mainly from the costs for the elderly. Of course these estimates are very messy because of the age composition of the immigrant popu- lation - more of whom came in recent years - and other uncertain- ty in the estimates. But one can draw two conclusions with great surety: 1) The slightly greater expenditures for immigrants on the narrowly-defined welfare programs are more than offset by other categories - indeed, dwarfed by them; therefore the welfare programs alone deserve no attention. 2) Overall expenditures for immigrants are not greater than for natives. Rather, expend- itures for immigrants are much less those for natives. DISCUSSION 1. Compared to 1975, the 1990b gap between natives and immigrants (smaller amounts to immigrants) is considerably larger in proportional terms, as well as in absolute dollar terms - just the opposite of what is commonly asserted. 2. The reckonings for Social Security, Medicaid, and schooling are very crude, deriving from aggregate rather than from micro data. But no conceivable inaccuracy in these reckon- ings could alter the overall conclusion. And some estimates must be included because this category of expenditures is by far the most important. 3. It would be more appropriate to make assessments on a family basis rather than a per-person basis. But calculations based on family data would surely parallel individual calcula- tions. 4. It also would be better to make assessments for immi- grant cohorts by date of arrival - say, by decade. The appropriate mode of analysis of the effect of immigrants on the public purse clearly is a present-value assessment based on the lifetime experience of the relevant cohorts of immigrants. This sort of analysis examines each of the past cohorts as a separate observation. If the present-value analysis is to be meaningful, however, the cohorts must be similar from period to period relative to natives; this requirement was met reasonably well in the United States data through the 1970s. Unfortunately, there are now no suitable data available for life-cycle analysis, not even household data for incomes on which to base tax estimates that can be matched with outgo data. Researchers have, however, attempted to make do, mostly considering data on the various entry cohorts lumped together. This article pulls together what may be learned from this body of work. The main conclusions surely hold especially strongly for the most recent cohorts of immigrants, however. These conclusions flow from the fact that recent immigrants tend to be young and in the labor force, and hence do not receive the most expensive government transfers - Medicare and Social Security payments. (Even older immigrants are not eligible for Social Security until they have been in the country many years.) But recent immigrants are the subject of most discussion, and they are the most rele- vant for policy decisions, in large part because the value of economic flows in the far future is greatly diminished by proper discounting at anywhere from (say) 3 percent to 7 percent a year; a dollar paid 30 years hence is worth very little today. 5. Much confusion arises because of the labels attached to various government expenditures. "Welfare" evokes charity, whereas unemployment compensation and Social Security are thought of as insurance programs and schooling is considered an entitle- ment. But proper economic reckoning ignores these labels and attends only to the flows of money to and from the native taxpay- ers. We must focus on whether immigrants are taking more out of the public coffers than natives are, in such fashion that (when combined in an overall reckoning with taxes paid), we can learn whether natives are made richer or poorer by the entrance of immigrants. Combining all the flows, as done here, is the appro- priate reckoning for that purpose. And this reckoning indicates that on the cost side, expenditures on immigrants are smaller than on natives, and have not been rising. 6. Any overall judgment must, of course, take account of the tax contributions of immigrants and natives as well as the expenditures on them. As a proportion of the taxes paid by natives, the taxes paid by immigrants probably have fallen since the 1970s because, according to data collected by George Borjas, the relative earnings of immigrants have declined -- 10.5 percent from the 1960s immigrants to the 1970s immigrants, and 7 percent from the 1970s immigrants to the 1980s immigrants. But even allowing for progressivity in taxes, it seems quite doubtful that the implied decline of 15 percent is great enough to balance or outweigh the increase in the gap on the expenditures side since the earlier assessments as of 1980. A solid assessment must await further research; for now, there is no reversal of the conclusion implied by the 1970s data. Appendix 1Additional Notes On Narrow Welfare Non-refugees who enter legally through quotas are not per- mitted to receive public assistance for three years, and may be deported if they obtain such assistance. Hence they cannot have a high rate of use of these programs. And illegals are often afraid to seek such assistance. Refugees, however, are entitled to such assistance immediately upon entry, which (together with their needy circumstances) explains a much higher rate of use of welfare soon after arrival. Among foreign-born persons aged 65 years and over, a mean- ingfully greater - and growing - proportion receive welfare than among natives. This has attracted much finger-pointing. But this is the result of some immigrants having arrived too late to qualify for Social Security benefits; the welfare is simply a substitute for Social Security, and does not indicate disproportionate use of government transfer payments. There is some evidence that post-1970 entrants use more of these welfare programs than do pre-1970 entrants (but lesser use by 1987-1990 than by 1970-1986 entrants; recent entrants require some time to learn about such programs.) Appendix 2 Explanation Of The Situation Of Social Security And Medicare At first it is puzzling that the heavy old-age expenditures in later years for the immigrants who arrive when young should be disregarded from the analysis - or what is the same thing, that the current analysis does not take fully into account cohorts of immigrants from many decades earlier, (even aside from the fact there were fewer who arrived earlier to be counted now). One may wonder whether the picture would be altered if we did a full accounting for the entire life-cycle of the immigrants. The answer to the latter question is "no". But explicating the matter requires a somewhat complex argument that is not intuitive even to trained economists. The explanation lies in the fact that any average group of natives - from the youngest to the oldest - may be thought to be always in a dynamic equilibrium with respect to taxes and transfers; the in-payments from workers equal all the out- payments, including those to the non-working elderly and for children. But because a cohort of immigrants arrives without a group of non-working elderly (the few who come are not eligible for Social Security, and the relatively small SSI payments to them are included in the analysis above), the immigrants are not at first in a dynamic equilibrium as are natives; instead, they gradually move toward the same dynamic equilibrium as natives during the period that the working-age persons in the immigrant cohort age. The difference each year between the dynamic-equi- librium taxes and transfers and the immigrant' taxes and trans- fers (putting aside taxes for now) constitutes the benefit to natives through the public coffers. That is, the receipt of old-age benefits now by immigrants who have been in the U. S. since their twenties or thirties should properly be considered part of an equilibrium system that includes their own children's generation. The children of retired immigrants support their parents with their taxes, just as the children of natives do for their parents. Hence the retired immigrants are no special burden upon natives. Put another way, there is a one-time windfall benefit to natives by way of immigration and the Social Security and Medicare system. The windfall does not go on forever; the amount of windfall per year declines from the time of the arrival cohort's entry until the working-age persons reach retirement (which in practice happens gradually, of course), at which time the dynamic equilib- rium is reached and there is neither windfall or deficit. For a fuller explanation of this point, see my 1989 book, The Economic Consequences of Immigration, or a new theoretical article avail- able upon request. None of this can be understood or estimated when one looks only at current flows of taxes and expenditures, which is why all the studies that use only current flows, undifferentiated by the arrival cohort of immigrants, do not reveal the crucial role of expenditures on the elderly. In practice, a careful life-cycle calculation embodying this effect must use actual age-distribution data for immigrants, and should abstract away from the different numbers of immigrants in different arrival cohorts. (The increasing numbers in recent decades would bias the results in favor of immigrants if not taken account of in a full analysis.) There is the further important consideration that fiscal events that occur long after immigrants' arrival are relatively unimportant because of discounting, but that argument is only icing on the cake. Julian L. Simon teaches business administration at the University of Maryland and is the author of The Economic Consequences of Immigration. 301-951-0922, fax 301-951-8468, 110 Primrose St., Chevy Chase, Md. page 1 article5 immcstsz November 9, 1995