The Center for Retirement Research at Boston College has a new study out on the problem of FICA tax avoidance by independent contractors and others who make a living in the “gig economy” or by selling online. They estimate it’s costing the Social Security trust funds $6.4 billion per year in lost revenues. They also note that this sort of thing leaves those involved with lower benefit amounts or no benefits once they become disabled or retire. They don’t mention the secondary cost to taxpayers of additional Supplemental Security Income (SSI) benefits paid to those who failed to pay FICA taxes when they were working.
16 comments:
When I worked as a CR at least once or twice a month someone would come in for an office appointment to retire. They were self employed, and I would pull the queries for the interview and find a low or no PIA. They were very proud of the "accountant that made all the profit go away for taxes and I never had to pay" until I told them they had no retirement earnings or only a few hundred dollars and Medicare Part B was going to get most of that!!! They were always outraged, "I have worked all my life" yelling and screaming, but they never paid in so they got nothing out.
The problem with putting so much burden on individuals to do important things like claiming, setting aside, and paying their own FICA taxes is that many people will fail to do so, and for various degrees of bad and good reasons.
To ignore this basic sociological truth and continue on with such a system knowing many people will be harmed rather than creating a regime where (retirement) benefits for the aged are guaranteed is unconscionable and unspeakably inhumane despite the solemn invocations of individual responsibility and the protestant work ethic justifying the wretched state of things.
The problem is that Social Security is not that good a deal, so people will avoid it if they can. Social Security has a lower return that if someone just bought Treasury Bonds. Also if you die before retirement age with no dependents, the government keeps your money.
No one would pick a private retirement plan that is structured like SSA.
That being said, the problem with avoiding FICA is that people that don't save/invest the equivalent amount, and so they don't build up a private retirement account.
These self-employed folks, who are usually GOPers who want to pay no taxes, do exactly like @ 12:12 says when dealing with their attorney tells them they are getting SSI only because they have no DIB eligibility or a very low PIA when they do have a DIB claim. Sometimes attorneys I'm sure tell them: "You get what you pay for".
I'm one of the main new client intake attorneys at my firm. Like 12:12 above, I consistently have people screaming at me, "but I've worked all my life" when I explain to them that we can't help them file for DIB benefits because they did not pay enough FICA on their earnings. I'm beginning to see this scenario more and more as the months/years go by. With today's gig economy where people are often independent contractors and not employees, many people will be left high and dry when it comes to disability and retirement benefits. This is an important part of the income inequality that continues to widen in this country and needs to addressed.
Totally agree with A 2:12PM. And to A 2:36PM, FICA should be looked at as insurance premiums. We pay for health and auto insurance and we may never have serious health issues or serious car accident, but goodness sakes if we did, we are sure glad we paid the premiums. Also, there are young mother's/father's and children who start collecting on a deceased spouses or parents record......certainly the deceased wage earners FICA is paid out (and pretty darn quick after benefits start being received by the survivor(s)).
This is a serious problem with family businesses. I have seen it time ad time again. Dad starts a business, has family work in the business, no one pays into the system or wages are severely minimized. Dad dies suddendly, family can't run the business without him. Widow and children have no survivor benefits.
This cautionary tale should be advertised in a PSA, it is that common.
Businesses are required to take all of the deductions they are legally entitled to take. But apparently many take more than is legal as often these folks live a regular middle class lifestyle until they file for SSA.
I'd like to see the opposite addressed--people with kids claiming self employment income of $9-15K each year for hair braiding, ebay, etc when they obviously haven't worked. How do we know they haven't worked? Ask them when they last worked and they may say 10 years ago for Target or Walmart. "What about these last 7 years that have self employment?" Oh yeah, I did.....(insert something that has no paper trail." I have known a few self employed folks who worked more hours than I do and they would never forget they had a business for many years. It's bad for the trust fund because people become insured who never worked a day in their life. They and their kids (this only works if there are kids) may collect for years, get Medicare, etc. It's bad for the taxpayers who are paying $4-5K to someone as a reward for working when they don't do anything other than file a fraudulent tax return. It does give the IRS some fraudulent alerts when we remove the earnings from the person's earnings record.
I also see this scenario, often followed by "They give all that money to =pick your favorite hated group- while good Americans like me can't get any help"
As to the comment above about SS not being a good deal, you omit the fact that 1.people won't actually buy treasury bonds or anything else if SS wasn't mandatory, and 2, SS also includes disability and survivor benefits. You know, the benefits our former house speaker got after his father died before he reached retirement age.
As noted above, SS is an insurance policy. Is is "Old-Age Insurance Benefits" or Disability Insurance Benefits" or "Survivors Insurance Benefits". It is the nature f insurance that some people never collect because they did not have an insured loss. I.e they never became disabled, they died before they were old enough to collect the retirement benefit, or they had no survivors.But it is also true that many, if not most in the long run, collect more than they put in and more than would have been returned if they had actually made the investments suggested.
SS is not perfect and it could pay more, but if you look back at what existed before SS was adopted, you would see just how critical and important SS has been to poor and working class Americans of over 75 years. Yeah, the rich could do better on their own, but they are different from he rest of us; they have more money. For the rest of us, SS is the best thing this country has ever done.
I too have seen instances where people made lots of money but paid into a private system or didn't pay into anything. In some instances, they bought too much to qualify for SSI. Then they became disabled and there was nothing else they could do. Social Security is a good deal.
10:39 AM. Unless you paid in for nearly 30 years while dealing with disabilities... Then could no longer work, got denied twice, waited nearly 3 years only to be denied by ALJ... still can't work... Appealed while reapplying... Denied by AC, Federal judge, 2 more times by DDS... appealed to circuit court/requested hearing... To put it in perspective, since I was last able to "work": the Patriots will be playing in their 4th Super Bowl in 5 seasons, 2 Winter Olympics have occurred, 2 World Cups have been played, Joe Flacco and Colin Kaepernick were just coming off their Super Bowl; the deflategate hoax and Russia hoax were well in the future, Hillary and Trump had not announced they were running for President, the Malaysian plane hadn't been lost yet, and Crimea was still part of Ukraine. Almost 5 years. I have spent 10 percent of my life waiting to be approved. I can't see the light at the end of the tunnel... I am not sure there is a tunnel. I see only darkness. And you think SS is a good deal! More like a sucker's deal.
No doubt Social Security's disability programs seem like a bad deal for those who aren't able to get their claims approved (usually because they aren't disabled). But anyone claimant the retirement program is a "bad deal" is just stupid or hasn't done the math. There isn't an investment vehicle in the universe that could reliably replace that much income, let alone replace that much income AND fund health insurance coverage for you from retirement through death, for for a measly 7.5% of your annual income.
Now, some might say "but it isn't a 7.5% contribution, it's a 7.5% contribution matched by the employer." That's true. But if you think your employer would fork that 7.5% FICA contribution over to you absent their obligation to pay it to the government for your benefit, then I've got a GREAT deal on a bridge I'd like to sell you.... And even if you choose to ignorantly view the program this way, it's STILL a damned good deal.
1:07, I agree that false claims of SE income are a problem (mostly for the EITC) and sometimes it's the person whose SSN is on the tax return who's lying and sometimes it's a case of identity theft and a completely different person files the return and gets a refund.
But for SSA, they either are getting the FICA taxes for these people (albeit for work that wasn't done, but the money is going into the trust fund) or they aren't insured, right? There's nobody who can say they were self-employed, not pay any FICA taxes, and collect benefits based on the self employment income? So it doesn't really affect SSA negatively.
@9:48
"There's nobody who can say they were self-employed, not pay any FICA taxes, and collect benefits based on the self-employment income? So it doesn't really affect SSA negatively."
Actually, with refundable tax credits like the EITC, one can claim self-employment and avoid FICA. So it very much places a drain on the system when folks claim just enough self-employment income to get a tax refund, then come back to SSA in their 60s to draw retirement income they never paid for.
@948--SSA does get the FICA taxes for self employment that wasn't done. And the person that committed the fraud collected $3-5K in tax refunds they weren't due, may collect SSA disability or retirement for years based on work that was never done, may have children receive benefits they shouldn't, may receive Medicare benefits for an extended period that they aren't eligible for and that doesn't affect SSA negatively? I beg to differ.
@2:36 for the bulk of the population, Social Security is an outstandingly good deal because it is always there. Stock market crashes? Still there.
The person who dodges Social Security without it leaving teeth marks on their rear end are the people with a net worth of seven figures or more.
I have an uncle depending on assistance from his siblings in order to get by. I have a friend who dropped dead while out running one day and his widow has had to move family in with her in order to float her mortgage, otherwise she'd be homeless because the benefit to their dependent child is a token amount.
Social Security is an excellent deal vs trusting people to save for the inevitability of old age, and is becoming a better and better deal all the time with evaporation of the defined benefit pension.
If Americans had just half the sense needed to stay out of the rain, they'd be clamoring to pull the caps to fund a benefit increase.
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