The Social Security trust fund is set to run out of money by 2032, according to the program’s latest annual report.
There are a number of policy proposals that could address this shortfall — everything from raising taxes and the retirement age, to scrapping the cap on taxable earnings, so that high earners contribute at the same rate as everyone else.
But labor economist Kathryn Anne Edwards wrote about another solution in Bloomberg earlier this month. Her idea? Tax companies that use gig workers.
For more, Marketplace’s Nova Safo spoke with Edwards, who also co-hosts the “Optimist Economy” podcast. The following is an edited transcript of their conversation.
Nova Safo: So, Kathryn, can you first of all tell us how the Social Security program works right now if you’re self-employed, and how it works for the companies that contract with self-employed individuals?
Kathryn Anne Edwards: Yes. If you are self-employed, and you do not have an employer, so think about it as you don’t get a W-2 at the end of the tax year, you pay both sides — the employer and employee side — of the Social Security tax. For the Social Security old age program, that’s 6.2% on the worker side and 6.2% on the employer side. You pay both. And then, of course, you pay both sides of Medicare as well.
Safo: So that’s basically what Congress has dubbed the self-employment tax, right? That basically, you’re paying everything.
Edwards: Yeah, you pay all components when you’re self-employed, and it is a not small tax to have on what many people consider to be a key pipeline to starting your own business, is starting out as self-employed and then becoming profitable enough that you’re able to hire people and incorporate as a business.
Safo: So yeah, initially the idea is that this is a way to build your own business, but we have the rise of the gig economy. So, things have changed, haven’t they, compared to when these ideas and these taxes were structured?
Edwards: Yeah. So, the self-employment tax — of paying both sides of the employer-employee side of Social Security — that was set in 1983. If you fast forward into the 2000s, we start to see the rise of something called “misclassification,” when workers who would be hired as an employee are instead hired as an independent contractor. And this saves the employer the burden of having to follow regulations that apply to their employees. And then it also saves them the Social Security tax and the unemployment insurance tax, the other payroll tax. That because they are not employees, they don’t have to pay the Social Security taxes on them.
And this idea of misclassification isn’t that these are people who struck out on their own to start their own business, but people who are looking for a job and instead of getting an employment contract, they get an independent contractor contract. And there’s research from the Treasury Department that over a 15-year period to kind of kick off this century, most of the growth of self-employment was coming through independent contractors who were probably misclassified.
Safo: How does it help solve the Social Security shortfall if you start taxing the companies, which is the idea you’re presenting here?
Edwards: Yeah, because an economist, which I am, would tell you if you move the tax burden over to the employer side, where now the people who use independent contractors have to pay their half, they’ll just take that immediately out of what they compensate independent contractors with. So, it’s really, you’re changing the letter of the law, but not the incidence of the actual tax.
The problem is, I think, twofold. One is that if you are self-employed, you lower your total tax bill by lowering your taxable earnings. You do things like claim expenses, and there’s lots of evidence that this is exactly what self-employed people do. They try to make their income look as small as possible for tax purposes, so they don’t have to pay as much in taxes. Well, that means that Social Security isn’t getting tax contributions in real time. But down the road, this means that people who are self-employed end up having lower Social Security benefits in retirement — probably lower than they were expecting, given the amount of money they earn.
I think the way that I see it, too, is just Social Security is a really fair program. It’s one of the reasons why it’s the most popular program in the United States, and Americans feel so strongly about it because it’s fair. You work; you pay into Social Security. You employ; you pay into Social Security. Since the last time we reformed the program, this “you employ but don’t pay into Social Security” category has gotten really large, and it’s not, I think, that hard for the program to take into account.
Safo: Would the incentives for employers change in ways that we can see coming if you are now taxing them for basically having gig workers, is the idea, right?
Edwards: Well, it certainly makes an independent contractor not as cheap as they were before, and hopefully, by neutralizing that financial incentive, you have more people hired as workers as opposed to employers. And remember, the Department of Labor in the U.S., as well as many states, has tried to clarify in their labor regulations who is a worker versus who is an independent contractor, because the U.S. believes that if you are employed by someone, you are deserved certain protections — things like the minimum wage, overtime, child labor. We built this into our economy, and we don’t want people to get around it by claiming that they don’t have workers anymore. I should clarify, if people are confused, that the people who would be hit hardest by this tax would be Uber, DoorDash, TaskRabbit. These really large gig employers who have a half a million partners whose Social Security taxes they don’t pay.
Safo: How much of the Social Security funding gap would this idea close?
Edwards: We have no idea. You know, Social Security, since 1985, has been publishing annually the warning that the trust fund will not last for forever. We’ve known this for 41 years now, and we have another five. I think because of living through a half-century of being told every year that the trust fund won’t last forever, we tend to view every policy, as it relates to Social Security, to the shortfall. This policy, yes, it would probably raise revenue, but it’s really about making Social Security purpose fit for the 21st century.
