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.
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 .
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.