How Social Security Reforms Could Affect Employers

Posted Wednesday, July 23rd, 2014  | Comments (1) rule

Philip Moeller
Contributing Writer, Money
Author, book on Social Security, under contract with Simon & Schuster
Speaker, on retirement and successful aging
Journalist and Editor, American History of Business Journalism
Research Fellow, Sloan Center on Aging & Work, Boston College

Social Security payroll taxes are a major expense for employers and employees alike. Each party now must pay 7.65 percent on the first $117,000 of covered wage earnings, with that amount split between Social Security (6.2 percent) and Medicare (1.45 percent, with the proceeds going to the Medicare trust fund that pays for hospital expenses under Part A of the program).

These taxes are nearly universal in private workplaces and, increasingly, in government jobs as well. It’s easy to see them as an immutable cost of business, which over time becomes a forgotten fixed cost. The same is true for employees, especially younger ones.

But in an aging nation, the importance of retirement in general and Social Security in particular will only grow. And if employers looked at the program with fresh eyes, they might be able to fashion better benefit programs and strengthen relationships with their employees in the process. Here’s a quick primer on Social Security and a look at the impact of changing payroll taxes.

Social Security reform has been just around the corner for years. The last major reforms in the program were enacted in 1983 by the Greenspan commission, headed by economist Alan Greenspan, who would later chair the Federal Reserve Board for nearly 20 years. Creating an authoritative commission was necessary because even 30 years ago, Congress could not muster the consensus to make changes in the program. Today, of course, Congress has trouble mustering a consensus that today is even today.

But cracks in the program’s finances have been evident for a long time. Changes billed as ensuring solvency for 75 years, it turns out, will endure for fewer than 50. The program did build up big surpluses but they are now being spent down, with benefits exceeding revenues at an accelerating pace.

The overall fund for OASDI (Old Age Security and Disability Insurance) is split into separate OAS and DI funds. The latter is in especially bad shape and will run out of money in about two years.

Congress could authorize that more money be siphoned into the DI fund from the much larger OAS fund. This has happened once before, and allowed Congress to defer broader reforms. Doing so again is possible but the time for fixing broader issues without causing major problems with people’s retirement plans has run out.

Common wisdom, while perhaps an oxymoron inside the Washington beltway, holds that people aged about 55 and older should be spared from any major negative changes in Social Security. They are close enough to retirement that they do not have enough time in their careers to adjust to any Social Security cuts.

With OASDI projected to be unable to pay all its scheduled benefits in only 15-16 years, the need for a 10-year lead time means that the program’s cushion will get much, much smaller before reforms begin to reduce annual deficits.

The menu of possible reforms includes extending the retirement age, reducing annual cost of living adjustments, means-testing benefits for high earners and other benefits tweaks. But there is no way to come close to balancing Social Security without changing payroll taxes.

While it’s called a payroll tax, Social Security taxes are not regarded the same way as income or sales taxes. Generally, people feel like their payroll taxes are a fair price to pay for their future Social Security benefits. Last year, the National Academy of Social Insurance found that people were willing to pay more in payroll taxes to preserve the program.

“Eighty-two percent of those surveyed agreed that it is critical to preserve Social Security for future generations even if it means increasing Social Security taxes paid by working Americans,” says Elisa A. Walker, a NASI policy analyst. “Responses were remarkably constant across political parties, age, income, and race/ethnicity. For example, those who agreed it is critical to preserve Social Security for future generations even if it means increasing Social Security taxes for working Americans include 74 percent of Republicans, 88 percent of Democrats, and 83 percent of independents.”

There are two major ways to boost payroll taxes: 1) raise the wage ceiling on which taxes are owed, and, 2) raise the percentage rate of the payroll tax. The impact of both were laid out in a recent report from the Congressional Budget Office.

Historically, 90 percent of wages were captured by payroll taxes. In recent years, wages have stagnated for the middle class but continued rising for higher earners. Today, as a result, only about 83 percent of wage income falls at or beneath the ceiling, which is $117,000 this year and rises each year by the rate of consumer price inflation.

Raising the ceiling back to 90 percent would be a logical first step toward boosting program revenues. If this were done (and it would need to be phased in over years), the wage ceiling would more than double, the CBO said. If the change were made all at once, the ceiling in 2015 would be $241,600. People earning between the current and new ceilings would get a boost in their eventual Social Security benefits in exchange for their higher taxes. But it would be a very modest boost. Social Security has a very progressive benefit formula that credits a high percentage of lower-earners’ wages but a very small percentage of high-end wages.

This increase would, by itself, close 30 percent of the program’s projected financial shortfall during the 75-year window from 2014 to 2089 (program solvency projections are based on a 75-year time span). Some people would like to load even more of the financial burden on wealthier earners.

Eliminating the ceiling and making all wages subject to the payroll tax would close 45 percent of the projected shortfall, the CBO estimated. And if higher Social Security benefits for high earners were limited more than under current law, it would be possible to eliminate nearly two-thirds of the system’s financial problems solely on the backs of the wealthy. For many reasons, I oppose this.

Increasing the OASDI part of the payroll tax to 7.2 percent from 6.2 percent (for both employee and employer shares) would close 60 percent of Social Security’s 75-year financial shortfall, the CBO projected. So if this were done and the annual tax ceiling were increased to capture 90 percent of wage earnings, 90 percent of the shortfall would be addressed.

Of course, solving Social Security’s problems is much easier on paper than in reality. Conservatives tend to oppose any tax increases and often seem especially against higher taxes for the wealthy. Liberals recently have rallied to the notion that Social Security reform must include higher revenues that would fund more benefits for lower-income earners.

Comments (1) for "How Social Security Reforms Could Affect Employers"


Encore Entrepreneurs to the Rescue

Posted Wednesday, July 9th, 2014  | Comments (5) rule
Solopreneurship and the End of “Retirement”

Jackie B. Peterson

Author of Better, Smarter, Richer | Business
Coach/Mentor for Solo, Creative, and Encore Entrepreneurs

Portland, Oregon Area | Professional Training & Coaching
Email: jackieb@jackiebpeterson.com

I think we can all agree: the later years of life—those decades formerly known as “retirement”—are changing rapidly… and radically. The Baby Boom gifted 21st-century America with a graying population: there are 78 million Baby Boomers, the first of whom turned 65 in 2011. Today, we’re turning 65 at a rate of about 10,000 a day, and 65+-year-olds make up about 13% of the U.S. Population.

Meanwhile, traditional pensions are dwindling and Social Security is in trouble. The recession and painfully slow recovery mean that retirement savings are in short supply, while many near-retirees have also lost home equity or a job. And because the population is growing older so quickly, programs for the elderly are expected to consume an ever-larger percentage of federal dollars (the projected statistics for 2015 put federal spending for the elderly at nearly half the federal budget).

Pretty bleak, huh?

But then there’s the upside! Americans are living longer, healthier lives than ever before. My friend Bill Zinke of the Center for Productive Longevity calls it the “longevity bonus”: “The gift of the 20th century to the 21st,” he says, “was 30 extra years of life!” Quality of life is important to us, and we’re learning more and more about how to get healthy, stay healthy, and make our later years better than ever.

So where does that leave us? A huge chunk of the population is approaching (or surpassing) “retirement age,” but retirement—in the traditional sense—seems out of reach … and the economic situation means that we really can’t afford to have people just sitting around. But even though all people want is JOBS, a staggering 78.5% of businesses never hire employees. These businesses are one-person ventures. Meanwhile, however, even if there were jobs, getting one would be another thing entirely: rampant ageism in the workforce has left a disproportionately high percentage of workers aged 50 and older unemployed for the long-term, draining their savings and forced to rely on government services.

Oh, and don’t forget! We have three extra decades of health to enjoy our retirement … or lack thereof.

It seems like a frustrating bundle of insolvable puzzles and Catch 22s, doesn’t it?

The good new is that it doesn’t have to be. Introducing one of the most interesting trends in the business world: encore entrepreneurship.

Encore entrepreneur
noun

  1. Someone who is 50+ and excited about their “next act”
  2. Part of the fastest-growing segment of the American workforce

The U.S. Small Business Administration has a whole campaign directed specifically at encores, and for good reason: among working Baby Boomers, more than five million run their own businesses or are otherwise self-employed.

Encore entrepreneurship solves a number of problems in one fell swoop: staying productive is a great way to stay healthy, and running a business (especially if it centers around something you love doing) is a great way to stay productive for those of us who can’t afford to spend our entire “next act” volunteering or pursuing a hobby. Furthermore, encore entrepreneurs can keep working without having to get all worked up about the JOBS issue … and that “keep working” bit is just what our economy needs right now (not to mention our wallets!)

In short, the encore trend is paving the way for an increasingly vibrant economy full of healthy people (and saving the government money on social services and elder care costs!)

Welcome to the Age of the Solopreneur.

Solopreneurs are entrepreneurs who work alone. They might be writers, coaches, consultants, or artists. They might be massage therapists or CPAs. They are outsourcing the help they need, treating their time as the precious commodity it is, and using their passion and talents to make a living (and a good one—successful solo businesses can make $100,000 or more a year). Whether they call themselves “freelancers,” “home-based businesses,” or “self-employed,” they are predicted to make up 50% of the labor force by the year 2020.

And yet everyone—from the highest-ranked politicians in the federal government to local Small Business Development Centers—is obsessed with the same old questions: Why aren’t there any jobs? How can we get more of them?

You see, I believe we’re measuring the wrong thing: we’re wasting our time talking about JOBS. What we need to be measuring is work. Given the huge percentage of solo ventures out there, we need to figure out how to teach solos to be successful, and stop agonizing about the lack of good old 9-5 JOB-jobs. My decades of working with small businesses have made me realize that traditional business wisdom, which focuses on the “pyramid model” of hiring employees, is simply not applicable to solo ventures. Solos need to BE the business and DO the work they love—not hire other people to do it for them. I’ve developed some tools to help solos on their path to financial success, and I’m convinced it’s possible for everyone.

But what brings this all full circle is that I’m convinced that it’s especially possible for Boomers and seniors. As we’ve already discussed, we’re seeing more and more encore entrepreneurs, and solopreneurship is the easiest way for encores to be in business because of its flexibility. So if the idea of starting a business makes you want to run the other way, hang on a second! The internet and all of the e-tools we have available have made solo businesses scalable; geography no longer matters. You can sell your product or service anywhere, anytime.

In addition, many encores already have the basic requirement, the very first principle for successful solopreneurship: they have a lifetime of learning in one particular area, meaning that they have a focused passion for a deep and narrow niche. Bill Zinke of the Center for Productive Longevity calls it “Double ESP”: Boomers and seniors have Experience, Expertise, Seasoned judgment, and Productivity. Doesn’t that sound like a recipe for a successful business?

Now, I don’t want to paint too rosy a picture: solopreneurship has it’s own unique set of challenges. But that, after all, is why I wrote my book, Better, Smarter, Richer: 7 Business Principles for Encore, Creative, and Solo Entrepreneurs … and started my own solo-encore venture! I would love to hear your entrepreneurial stories and help make your next act better, smarter, and richer—drop me a line or visit me on the web!

Comments (5) for "Encore Entrepreneurs to the Rescue"




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