Testimony by Commissioner Jo Anne B. Barnhart
Hearing on International Social Security Agreements
Subcommittee on Immigration, Border Security, and Claims
September 11, 2003
Mr. Chairman and Members of the Subcommittee:
I appreciate the opportunity to appear before the Subcommittee to discuss
international Social Security agreements, commonly referred to as "totalization" agreements.�� In
my testimony today I will:
- ������ Provide an overview on totalization agreements including the
process for approval;
- Dispel some of the myths and correct misinformation that has appeared
in the media in recent months concerning what Social Security totalization agreements are and
do, as well as what they do not do;
- ������ Bring you up-to date on the status of ongoing negotiations
regarding a possible totalization agreement with Japan;
and
- ������ Provide a status report on our discussions with Mexico.
First, what are Totalization Agreements?
Totalization agreements protect the benefits of workers who pay into
the social security systems of two countries but do not earn sufficient
credits to receive full benefits from one or both countries.� Workers
are deemed eligible for pro-rated benefits based on the amount of contributions
made to the system of each country.� United States totalization
agreements include all OASDI programs.
Totalization agreements eliminate dual social security taxation of citizens
of one country who are sent by their employer to temporarily work in
another country.� In addition to Social Security taxes, foreign workers
can be exempted from Medicare contributions and U.S. workers
can also be exempted from health insurance and other taxes related to
employment imposed by a foreign country in which they temporarily work.� Individuals
from a foreign country who are hired in the United
States or were sent to the United
States for more than a temporary period would continue
to pay FICA taxes.
Without totalization, the combined Social Security tax rate that U.S.� employers
and employees working in foreign countries must pay often approaches
40% or more of total payroll.� Under existing agreements, the annual
foreign tax savings of U.S. workers
and their employers total more than $800 million.� In contrast, the annual U.S. tax
savings of foreign workers in the United States and
their employers total only about $200 million.
The US has totalization agreements
with 20 countries, including Canada and
most Western European countries.
Myths:
As I mentioned earlier, there has been a good deal of misinformation
about totalization agreements in the media in recent months.� Specifically,
I have identified what I call "myths" about totalization agreements --
largely related to Mexico --
that have appeared in the media over the last few months.� I want to
specifically address each of these "myths".
- ������ Myth #1:� A totalization agreement with Mexico would
change existing immigration policy.
The truth is a totalization agreement does not address immigration
laws.� The Social Security Administration does not set immigration
policy -- and the totalization authority as passed by Congress
in 1977 has nothing to do with immigration policy.� A totalization
agreement only deals with 1) Social Security payroll taxes and
other employment-related taxes associated with work performed
by U.S. workers hired in the U.S. and sent to work in a foreign
country and foreign workers sent to work in the U.S.� 2) workers
with insufficient work credit earned� to become eligible for
full benefits in one or both countries.
- ������ Myth #2:� One result of a totalization agreement with Mexico will
be to begin to pay benefits to undocumented or illegal aliens.�
As is the case with our existing agreements, a totalization
agreement with Mexico would
not alter current law on this issue.� Totalization agreements
do not have any effect on the prohibition against payment of
benefits to illegal aliens in the United
States.
- ������ Myth #3: A totalization agreement with Mexico will
cost the United States $345
billion.
$345 billion is the approximate amount of total wages
for all workers in the Earnings Suspense File (ESF) since 1937
and has no relationship to the cost of totalization agreements.� SSA
actuaries estimate the cost of a possible totalization agreement
with Mexico to be $78
million in its first year rising to $138 million in its 5th year
-- for an average cost of $110 million a year.
- ������ Myth #4: All of the earnings in the suspense file came
from undocumented -- or illegal -- aliens.���
Earnings in the ESF represent wages we are not able to post
to a specific individual's earnings record because the name and
Social Security number do not match.� Therefore, the suspense
file is made up of all earnings that for whatever reason can
not be credited correctly to a specific Social Security record.�
Name and SSN mismatches can occur for a number of reasons including
transcription or typographical errors, name changes due to marriage
or divorce, and incomplete or blank name or SSN.� While a portion
of the ESF represents earnings by undocumented aliens, it also
includes earnings from legal aliens and U.S. citizens.
- � Myth #5: Totalization agreements enable non-citizens who work
in the United States for
a very short period of time to receive full American Social Security
benefits.
False.� Totalization agreements provide that the United
States will pay pro-rated benefits to those
workers who have: (1) between 6 and 39 quarters of coverage with
the U.S. system; and
(2) a combined work record of at least 10 years in the United
States and a partner country.� Again, I
emphasize, the benefits are paid on a pro-rated basis.
Why Enter Into Totalization Agreements
In 1977, Congress enacted the provisions that authorized the United
States to enter into totalization agreements for
two basic reasons:
���������
- ������ To ensure fairness and equity by providing social insurance
for those who -- because they have split their careers between the
United States and another country-- might otherwise end up with insufficient
credits to become entitled to a benefit from either country.
- ����� And to protect American workers and businesses involved in
international trade and commerce from double taxation and thus enhance
trade with foreign nations.�
The United States has had a
totalization agreement with Canada,
our largest trading partner, since 1984.�� As you know, Mexico --
our other NAFTA partner -- and Japan are
our second and third largest trading partners.
Totalization Agreement with Japan:
SSA has been discussing the possibility of a totalization agreement
with Japan for many years.� Talks
bogged down because Japan insisted that U.S. workers temporarily living
in Japan pay into the Japanese national health insurance system (currently
a tax equal to 8.5 percent of payroll and expected to more than double
in the coming years). Negotiations with the Japanese Government were
successfully concluded on August 1 of this year.� I am happy to report
that the United States obtained
important concessions from the Japanese Government on a number of issues
including an exemption for U.S. workers
and their employers from paying into Japan's
health insurance system.� Following an internal legal review, I expect
to transmit the draft agreement to the State Department by the end of
this calendar year and would expect that it would be implemented sometime
early in calendar year 2005.� ��������
Totalization Agreement with Mexico:
SSA has had informal discussions with Mexico over
the last two years regarding a potential totalization agreement.� Last
year, I asked Deputy Commissioner Martin Gerry to visit Mexico with
a team of senior SSA officials in order to determine whether Mexico was
prepared to administer a totalization agreement.
The team met with counterparts in the Mexican government; was briefed
extensively on Mexican social security operations, data collection and
storage systems; and visited Mexican social security field offices.� Based
on this visit and on follow-up discussions, the team concluded that Mexico was
prepared to administer a totalization agreement, including the ability
to provide the records necessary for SSA to determine the eligibility
of individuals to totalized benefits.
The Process After an Agreement is Negotiated:
After a totalization agreement is negotiated, the first step is for
SSA's General Counsel to review the draft agreement to ensure that it
is fully consistent with American law.� Second, the State Department
reviews the draft agreement in terms of its consistency with overall
American interests.� If the draft is cleared by the State Department,
and the White House, the agreement is then formally signed by representatives
of the two governments.
The Secretary of State then transmits the signed agreement to the President
who, in turn, transmits it to the Congress where it sits in review for
60 session days.� Once the Congressional review is completed and the
partner country has completed all of its necessary clearances, notes
are exchanged between the two governments indicating their readiness
to implement the agreement.
Typically, the agreement calls for it to take effect about 3 to 4 months
following the exchange of notes; in practice most agreements have become
effective about 12 months following submission to Congress.� Congress
has never voted to disapprove a totalization agreement.
Cost of These Agreements:
SSA's independent actuaries have produced estimates for each of these
potential agreements based on assumptions of how each might look when
drafted, including estimates of the number of individuals affected by
each agreement and its cost impact on Social Security trust funds.� Based
on the actuary's estimates, over the first 5 years, U.S. workers
and their employers would be relieved from paying $134 million in taxes
to Mexico and $634 million in
taxes to Japan.� United
States workers and their dependents would be paid
additional benefits because of the agreement in the amount of $29 million
from Mexico and $130 million
from Japan.
The cost impact on Social Security trust funds would be negligible over
a 75-year period in both cases.� Expressing the cost in this manner -"over
a 75 year period" - is consistent with the manner in which the actuarial
condition of the Social Security program is presented in the reports
of the Social Security Trust Funds.
As I mentioned, the cost to the Social Security trust funds of a totalization
agreement with Mexico would
be $78 million in its first year rising to $138 million in its 5th year,
an amount significantly lower than the current annual cost of our agreement
with Canada (about $200 million).
The costs of a totalization agreement with Japan are
estimated to rise from $82 million in year one to $130 million in its
5th year-very similar to those estimated for Mexico.
Conclusion
I want to thank the Subcommittee for inviting me here today.� I welcome
the opportunity to clear up some of the misinformation that has been
circulating about how totalization agreements work as well as the cost
impact of totalization agreements.
I would be happy to answer any questions you may have.
Top of Page
|