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Newcomers’ Burden

Who, if Not Immigrants, Will Pay for the Baby Boomers’ Retirement?

By James A. Thomson

James Thomson is president and chief executive officer of the RAND Corporation.

PHOTO: DIANE BALDWIN

Lost in the developed world’s heated debate over immigration is a stark demographic reality: As their populations age over the coming decades, the United States, Western Europe, and vast swaths of Asia will grow increasingly dependent upon immigrants to join their workforces, prop up their economies, and help fund social welfare programs.

Growing longevity is good for individuals, but it confronts nations and societies with a host of problems as well. Not least are the costs of social welfare programs for the elderly, such as Social Security and Medicare in the United States. From now through mid-century, the retirement of the post–World War II baby-boom generation will shift the balance in many countries between those paying into such programs and those drawing benefits from them. Between 2006 and 2050, the share of the U.S. population over age 60 will rise from 17 percent to 26 percent. In China, it will nearly triple, from 11 percent to 31 percent; in Europe, it will climb from 21 percent to 34 percent.

As graying workers exit the workforce, new workers will be needed to replace them. In this respect, the United States should fare relatively well. To maintain a constant labor force between now and 2050, the United States will need to “import” only 330,000 immigrants a year; currently, the United States adds about 1 million immigrants to its population annually. But maintaining a constant labor force will be a huge challenge for other developed countries. Japan, an “immigration-resistant” society, would need to import 600,000 a year; and Europe as a whole would need to import 2.9 million a year.

Even with large-scale immigrant-driven population infusions, however, the social welfare programs of all these societies will still be threatened, because their dependency ratios — the proportion of retirees drawing from social welfare programs to workers paying into the programs — will still climb. To maintain a constant dependency ratio through 2050, the United States would need 10.8 million new immigrants per year. This is ten times the current level of U.S. immigration and clearly not a realistic target.

The fiscal repercussions of aging populations will therefore be profound. Developed societies will see mounting financial pressures on old-age pension systems and dramatic increases in the cost of health care. In places where safety nets for the elderly are incomplete or do not exist today — such as China, India, and other developing countries — there likely will be clamors to devise and implement basic programs.

Many U.S. policy options were spelled out by RAND researchers in a 2004 book, The 21st Century at Work. To help refine the options for several aging nations, RAND researchers are involved in health and retirement surveys of people over age 50 in the United States, 15 European countries, Mexico, Japan, China, and South Korea. RAND Europe has also found that government-subsidized programs designed to raise fertility rates show some promise.

The policy options inevitably must fall into one of two categories: increasing tax collection or decreasing benefits. Immigration falls into the first category, as do increased fertility, greater labor force participation, longer careers, employment of retirees, and higher tax rates. In the second category are such options as raising retirement ages, indexing benefits to prices rather than wages, limiting health care benefits, requiring greater cost-sharing for health care, and means-testing.

At RAND, we hope to determine the best ways forward. At a minimum, we in several nations around the world would be unwise to deny ourselves the dividends of immigration, because it will lessen the burden of other, probably more challenging, options, such as reducing benefits.