Social Security Archives - Jane the Actuary

October 16, 2021December 30, 2024 Jane the Actuary General Interest, Retirement

Forbes post, “Here’s Why, Actually, The IRS $600 Bank Reporting Proposal Is Entirely Reasonable

Originally published at Forbes.com on October 16, 2021.

Over the last several days, we’ve seen the Outrage Machine in action over a new Treasury proposal to require banks to report to the IRS new information on U.S. bank accounts, in addition to the existing reporting of interest payments. This proposal, as described at CBS News (among, of course, many other sites) would require banks to report the gross annual inflows and outflows in bank accounts, ostensibly to catch high-income tax-dodgers. Because the threshold for reporting was set at $600, skeptics are, well, skeptical of the assertion that this change would only affect, as the Biden administration claims, those earning over $400,000 per year.

At the Heritage Foundation, a commentary claims that this change would be “invading your privacy and putting more of your financial data at risk,” citing past leaks at and politicization of the IRS. A group of 40 banking/credit industry organizations likewise objected that Americans’ financial privacy was at risk and claimed that this new requirement would deter unbanked households from establishing accounts. And other politicians, as cited in fact checks, mischaracterizing the proposal, claim that it would result in the IRS examining the particulars of every $600 transaction. Whether the very low threshold is an indication that the administration is being dishonest in its claims that their objective is only to catch wealthy tax cheats when they are, in fact setting the stage for a wider pursuit, or whether this is more a matter of failing to think through the implications of such a low threshold, who can say.

But at the same time, the other day, while driving home, I listened to a fairly generic conservative radio talk show host angry about this proposal. He was not angry about privacy concerns, and certainly not about whether people at the margins would be deterred from opening bank accounts, nor about the cost to banks of compliance with the new regulations. No, what he was up in arms about was the fact that Americans would be obliged to pay tax on their moonlighting self-employment income.

So here’s the plain-and-simple reality: Americans owe FICA tax on all their income up to the ceiling, and are obligated to report all their income in calculating their income tax. There is no legal, moral, or ethical right to underreport just because your income came from some other source than a “real job.” A babysitter, an Ebay reseller, someone who picks up handyman jobs on the side — all these folks have an obligation to report their income. (As a parent and Band Mom, I’m personally learning the ropes here, as our group navigates sending Form 1099s to college students and local musicians who are hired periodically.)

And — without wishing to wade into the entirely separate issue of high-income tax cheats — the “shadow economy” in the United States is substantial. Estimates are hard to come by, but one guesstimate is that the underground economy amounted to 11 – 12% of US GDP in 2018. A 2012 survey indicated that 91% of nannies reported being paid under the table. Among all household workers, another estimate found rates of between 74% and 97%, depending on methodology. And of course, the under-the-table workforce extends far beyond household workers, though it gets harder to quantify when we’re talking about other sorts of self-employed people not reporting their income, or small employers paying under the table. (A brief perusal of reddit suggests this is not unusual for restaurants.)

But consider this: some time ago I discussed a book, Downhill from Here by Katherine S. Newman, which lamented gaps in the retirement system, such as multiemployer pension insolvencies and the retirees of Detroit, whose pensions were cut modestly with the city’s bankruptcy. I didn’t place too much credence in her arguments, lamenting as she did, for example, that the city of Detroit did not, in fact, sell art from the Detroit Institute of Arts to preserve pensioners’ benefits in full.

But in addition to these stories, she featured profiles of Americans who were working well past traditional retirement age, including Leslie, who ran a home daycare “off the books” and built up so little official employment history that her Social Security benefit was “almost nothing,” and Marissa, who was mostly paid under the table for housecleaning work and likewise had no meaningful Social Security benefit. In case case, Newman implies that it is a matter of unjust Social Security plan design that these women have no/few benefits rather than acknowledging that it was an intentional decision not to report their income.

In the same way, there are periodic sympathetic news reports of women formerly employed as nannies or housecleaners who became unemployed in the wake of the pandemic — but it doesn’t occur to those journalists that, to the extent that those women were employed, rather than self-employed, they should have qualified for unemployment benefits, or would have, had they been paid on the books. And, of course, again, people who are employed, rather than self-employed, under-the-table lose access to workers’ compensation should they be injured.

Yes it’s unpopular to talk about this. There’s a presumption that people working under the table are poor, so that it would be unfair to enforce the requirement to pay taxes. Certainly, many of these workers would have incomes low enough that they would not be obliged to pay income taxes, though payroll/FICA taxes apply to all income. But for others, this is a sideline, and in yet other cases, they are genuinely employed, not self-employed, and have an employer who profits from the ability to escape taxation on some of their payroll.

And it’s not just a matter of lost taxes, or lost Social Security benefits. There’s something more fundamental that’s lost in our society when we treat participating in taxation and social insurance systems as somehow optional.

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

August 18, 2021December 30, 2024 Jane the Actuary Uncategorized

Forbes post, “It’s Time To Stop Calling Social Security’s Annual Increase A ‘Raise’”

Originally published at Forbes.com on August 18, 2021.

In the news last week, headlined “Social Security could get its biggest raise since the 1980s”:

“Social Security recipients could be in for some good news, as financial experts say a Cost-of-Living-Adjustment, or a COLA, could increase their monthly checks next year.

“Social Security entitlements haven’t gotten a decent boost in decades and the program barely kept up with the cost of living. But next year, those checks could be bigger. . . .

“Inflation is creeping up. While that’s bad for the economy, it’s good if you live on Social Security. Every year, the entitlement benefit millions of people rely on is adjusted to account for inflation. Over the last 20 years, inflation hasn’t been a big issue, so the monthly payment hasn’t gone up all that much. In 2021, the increase was 1.2%, but next year, the Cost-of-Living Adjustment might increase by 6.1%.”

This report comes courtesy of a local NBC affiliate out of Charlotte, WCNC, but we see this sort of rhetoric repeatedly:

At The Motley Fool: “Seniors Could Get a 6.2% Social Security Raise in 2022.”

“Seniors who rely heavily on Social Security often find themselves cash-strapped in retirement. That’s because those benefits aren’t always so generous to begin with, and also, because the raises they get (known as cost-of-living adjustments, or COLAs) are often stingy themselves.

“In 2021, seniors got a 1.3% boost to their Social Security benefits. But next year’s raise is shaping up to be a lot more substantial.”

NASDAQ, “Social Security Recipients Could Get a Big Raise Next Year.”

“Your Social Security income could get a nice boost next year if inflation continues to climb. Every year, Social Security considers changes in the price of goods and services to determine if Social Security recipients deserve a raise.

“Based on changes so far this year, the increase could exceed 4% in 2022. If so, then the increase would be the biggest increase since 2008, when recipients nabbed a 5.8% bump up in retirement income.”

The reality, of course, is this is not actually good news. These adjustments to Social Security benefits are merely meant to keep benefits in line with inflation, and workers themselves will expect pay increases that match inflation to be owed to them, and deem a raise at CPI level to be no real “raise” at all.

And, in fact, high inflation is still bad news for seniors, even if the CPI adjustment is meant to hold them harmless. Despite the decline in pensions for new workers, traditional defined benefit pensions remain an important source of retirement income, with 56% of retirees reporting a pension in a Federal Reserve study in 2017 (thanks to Retirement Income Journal for the link), and, although states like Illinois are notorious for their guaranteed, fixed annual increases, not all states offer CPI adjustments, and CPI adjustments are exceedingly rare in the private sector.

In addition, according to that same study, 58% of retirees report savings in an IRA or other retirement savings account, and 53% report other forms of savings. While, generally speaking, investing in stocks is considered to be a good way to ensure your money doesn’t lose ground to inflation, retirees are instructed to shift their assets away from stocks and into bonds, for example, with a rule of thumb such as the “100 minus age” rule, that would instruct 75 year olds to keep 25% of their assets in stocks. And it goes without saying that assets in fixed income investments (other than TIPS, with their low investment return) have no inflation protection.

And, again, those outlets are reporting a CPI increase of 6.1%. That’s substantial. Presuming that the inflation rate is consistent across various types of spending (rather than reflecting a “market basket” tilted toward young people or families), that’s a loss in value, in fixed pensions and investments, of 6.1%.

Do politicians and pundits shrug it off because retirees are, well, old? Because they deem anyone with savings or non-CPI-adjusted pensions to be “rich” and unworthy of concern, a matter of collateral damage in the quest for economic goals which produce inflation as a consequence? Remember that prior to the election, Congressional Democrats began pushing for the Federal Reserve to explicitly make reducing racial inequality a part of its mission, stating that they believed that the Fed had “raised interest rates too quickly in the past, hurting the job prospects of Black and Hispanic workers, who are often the last to get hired” — which suggests (though, to be sure, doesn’t directly state) that the Fed should be more tolerant of inflation in order to reduce the unemployment rate to even lower levels with a reduction for even those groups with the highest unemployment rates, and which, in turn, suggests a level of support for policies meant to benefit “the disadvantaged” of one sort or another, regardless of the degree of inflation they trigger.

The bottom line is that a high Social Security annual increase is not something to celebrate. It’s time to stop calling it a “raise” and treat it as what it is, an adjustment meant to hold retirees harmless, which may or may not be effective at its goal depending on personal circumstances.

July 19, 2021December 30, 2024 Jane the Actuary Retirement

Forbes post, “What Millennials Really Think About Social Security – And Why They Might Not Be Entirely Wrong”

Originally published at Forbes.com on July 19, 2021.

What do Americans believe about Social Security? A new poll by Nationwide Financial, with splits by generation, gives us some answers. Here are four key items from the survey:

Millennials are much less informed about the general nature of benefits: on average, this age group (ages 25 – 40) guessed that the full retirement eligibility age was 52 (compared to an average guess of 59 for Gen Xers (ages 41 – 56) and age 64, for Boomers and older; the actual age is, of course, age 67 for all but those closest to retirement.
Generation Xers, on the other hand, have the least confidence in the security of Social Security funding — with 83% either “strongly” or “somewhat” agreeing that they “worry about the Social Security program running out of funding in my lifetime,” compared to 77% of Millennials and only 61% of Boomers and older.
However, nearly half of Millennials, 47%, strongly or somewhat agreed that “I will not get a dime of the Social Security benefits I have earned,” compared to 33% of Gen Xers and 12% of Boomers and older.
At the same time, over half of Millennials, 61%, agree or strongly agree that “Social Security on its own should be enough to help me live comfortably in retirement,” which is far, far more than the 41% of Gen Xers and 31% of Boomers and older.

What should we make of this?

The standard response to these survey results is to say something like this, quoting CNBC in an article titled (as is par for the course for this sort of article), “71% of Americans are worried Social Security will run out of money in their lifetimes. Why experts say that won’t happen”:

“The trust funds on which Social Security relies to pay benefits have been running low. The last official projection by the Social Security Administration indicated those funds could run out in 2035, at which point 79% of promised benefits would be payable. . . .

“Even so, fears that the program will run dry and benefit checks will stop are unfounded, said Shai Akabas, director of economic policy at the Bipartisan Policy Center. . . .

“’It is highly unlikely that it is going to disappear anytime soon.’”

But let’s give these respondents a fair hearing, rather than immediately writing them off as uninformed.

As to the apparent belief that Americans can collect Social Security far earlier than is actually the case, I can only guess that survey-takers misunderstood the question as I don’t believe it’s credible that substantial numbers believe they can actually collect Social Security so young. Perhaps they understood this to include eligibility for disability, perhaps they thought this was the age in which a person would have earned the minimum number of “coverage quarters” required, or something else. I tend to discard this answer as simply not meaningful.

Are Americans right to believe that Social Security may “run out of funding”? When it comes down to it, it’s a matter of interpretation: after all, I do believe it is very likely that Congress will not act before the Trust Fund runs dry, and that, regardless of when they act, it is highly likely that they will shift Social Security’s funding to that of ordinary tax revenues rather than a special Trust Fund. After all, the Trust Fund made sense when the program was established and it was intended that funds would build up for a time before being paid out, and again in the reforms of the 80s when Baby Boomers had hit their peak earning years, but now there is no such demographic bulge but merely an ever-diminishing number of workers relative to retirees. What’s more, the Democrat’s proposal for age 60 Medicare uses general revenues rather than a dedicated funding source. In addition, the child tax credits being celebrated now are being called “Social Security for children” despite any similar special “Trust Fund.” These developments, along with substantial plans for government spending expansion in general, make it all the more likely that the notion of a “Social Security Trust Fund” will not continue after its current funds are depleted.

Are Americans — and especially Millennials — right to suspect that they personally will not receive Social Security benefits? Again: it’s not unreasonable. In an environment in which there is so much talk of so much government spending, paired with seemingly endless partisan rancor, it indeed seems reasonable to surmise that the Social Security system, 27 to 42 years from now, could be much-altered and, quite possibly, be reserved for the poor. It seems rather likely that young adults in particular would believe that, regardless of their current finances, they would make their way up in the world to earning enough, relative to their peers, to be disqualified for welfare benefits.

Finally, again, in a world in which there is so much talk of a substantial expansion of government benefits, and so much disconnection of Social Security from its prior promise that is earned by paying into the system, it is no surprise that the majority of Millennials would view it as just another benefit system. Consider, after all, that 43% of Millennials support a “universal basic income,” compared to 37% of Gen Xers and 22% of Boomers, according to Victims of Communism polling; and that 47% of Millennials, compared to 39% of Gen Xers and 34% of Boomers, had a favorable opinion of the term “socialism.” If they believe that the government ought to, in a moral sense, be giving ordinary Americans more money than is now the case, it stands to reason that expectation would likewise be the case for Social Security. And, of course, the refrain of Democratic candidates during the last election was that they would “expand Social Security,” and surely far more voters heard that refrain, than dug into the details to learn the expansion promised was relatively small in scale.

What this boils down to, in the end, is not as simple as a throwaway explanation that Americans aren’t educated enough on Social Security. Rather, it seems more likely that their preferences have simply changed, compared to their elders — a change which may be positive, to the extent that it opens up opportunities for a complete redesign of the system, but may increase the difficulty of a successful political resolution, if too many Americans believe they can get the proverbial “free lunch.”