Social Insecurity Affects Small Business

The New York Times this morning reported that the Social Security Administration will dole out more in benefits this year than it will receive in payroll taxes. Policymakers thought they had until 2016 before they had to deal with this impending issue. The weak economy has brought it to the front burner because jobs disappeared and retirees applied for benefits sooner than they had anticipated. With fewer paychecks to tax, Society Security went into the red.

For small businesses, this issue hits home on multiple fronts. Most small businesses cant afford to offer employees retirement plans, so they depend on Social Security for a major portion of their retirement income. They rely on Social Security for solvency. But if Congress raises Social Security taxes to cover their retirement plans, small enterprises will be hit on the front end. Small business owner must pay payroll taxes whether they are profitable or not. Currently, employers pay 6.2 percent of each employee’s taxable earnings to Social Security. The employee matches that 6.2 percent. Self-employed individuals have to pay both the employer’s and the employee’s share. Many times it is their biggest source of taxation.

According to the National Federation of Independent Business, more than 80% of its members and the small business community at large oppose raising Social Security payroll taxes. Raising the tax would increase the cost of hiring an employee, not exactly a good incentive in an economy that desperately needs to create more jobs.

So what other options exist to solve this quickly approaching insolvency? The obvious option is to raise retirement age. With retirees these days staying active into their 80’s, working an extra two years would put more money into Social Security and take less money out. Bu this choice is extremely unpopular across the labor force, including business owners. What about reducing retirement benefits for the independently wealthy? That option won’t fly with voters either. The easiest choice politically would be to solve the problem by printing money, but we all know how that one ends.

Currently, the shortfall is only at $29 billion, a small amount relative to the $700 billion that flows in and out of the system, which has a balance of $2.5 trillion. If the economy can somehow recover swiftly, that cushion will begin to grow again before the baby boomers start to retire in droves. At that point outlays will exceed revenue regardless of how the economy performs. This problem warrants a long-term solution rather than a band-aid to ease the pain.