Personal Finance

Fixing Social Security requires addressing immigration ‘fraud’

Published

2 weeks ago

October 1, 2024

Republican vice presidential nominee, U.S. Sen. JD Vance speaks at a campaign rally at Radford University on July 22, 2024 in Radford, Virginia.

Alex Wong | Getty Images News | Getty Images

Many voters ages 50 and up say two issues — Social Security and Medicare — could decide how they cast their ballots this November.

The presidential candidate who wins on Nov. 5 — either former President Donald Trump or Vice President Kamala Harris — may be tasked with restoring solvency to those programs as they face looming trust fund depletion dates.

Republican vice presidential candidate JD Vance, in a Sept. 12 interview on CNBC’s “Squawk Box,” said that first addressing another issue, immigration, could help the programs’ funding woes.

Vance said Social Security and Medicare are facing a “massive fraud problem” because of undocumented immigrants who are collecting benefits, citing what he said were incidents of fraud related to him by some of his constituents and friends.

“Before we start talking about doing anything to the benefits for Americans who have earned them, let’s deal with the illegal alien fraud in our Social Security and Medicare system,” Vance said. “I think that costs us a lot of money.”

JD Vance blames 'illegal aliens' for fraud problems in Social Security and Medicare

It’s not the first time the Trump-Vance campaign has suggested immigration is hurting the programs that millions of retirees rely on for monthly benefit checks and health-care coverage.

Trump in March said on social media platform Truth Social that Democrats are “killing Social Security and Medicare by allowing the invasion of the migrants.”

Meanwhile, Harris has talked about creating an “earned pathway to citizenship,” which may encourage immigrants to work and contribute to the programs. The Harris campaign did not provide CNBC more details on those plans.

Who is eligible to benefit from Social Security?

The Social Security Administration assigns a unique Social Security number to each individual who is either a U.S. citizen; is lawfully admitted to the country as a permanent resident; is lawfully admitted on a temporary basis with Department of Homeland Security authorization to work; or has a valid non-work reason for needing a Social Security number, according to the agency.

A Social Security number is required for most jobs in the U.S., and employers are typically required to deduct payroll taxes from each employee to fund programs including Social Security and Medicare.

Over many years of work, the employee usually contributes a sufficient amount to be eligible to claim monthly Social Security checks and Medicare benefits when they retire or become disabled.

Documented immigrants — such as those with permanent status and dual intent temporary visas — pay the payroll taxes that contribute to Social Security and Medicare, according to Tara Watson, a senior fellow at The Brookings Institution and author of the book “The Border Within: The Economics of Immigration in an Age of Fear.”

Generally, undocumented immigrants are not eligible for Social Security or Medicare benefits, Watson said, but they may pay in to the programs anyway.

Some undocumented immigrants may use false Social Security numbers to work in jobs that require payroll tax contributions to Social Security and Medicare, and therefore they unofficially contribute to those programs, she said. Others, such as seasonal workers, may not pay payroll taxes.

Many long-term immigrants do receive benefits after contributing to the programs and earning eligibility, Watson said. Immigrants may eventually qualify for Social Security benefits if they are present in the U.S. lawfully and earn the required credits by working and contributing to the program, according to the American Academy of Actuaries.

Undocumented immigrants contributed $33.9 billion in federal social insurance taxes in 2022 toward Social Security, Medicare and unemployment insurance, according to the Institute on Taxation and Economic Policy.

Yet because of their immigration status, those workers are barred from accessing those benefits.

How widespread is Social Security fraud?

There are two common types of Social Security fraud involving immigration: When people who aren’t eligible for a Social Security number either steal one or create a false one so they can try to get a job in the U.S., and when people who aren’t eligible for Social Security or Medicare benefits use a fraudulent name or Social Security number to claim benefit payments.

Committing these kinds of fraud isn’t easy.

But it is possible for some people, including some undocumented immigrants, to carry it out.

Stealing benefits can be difficult, since it requires tapping into someone’s Social Security account and changing their bank account information to access the money, according to Andrew Biggs, a senior fellow at the American Enterprise Institute and former principal deputy commissioner at the Social Security Administration.

After the Social Security Administration started allowing individuals to change their bank deposit information through their online accounts, the agency and the Office of Inspector General began receiving complaints of unauthorized changes, Jeffrey Brown, deputy assistant inspector general at the Social Security Administration Office of the Inspector General, told the House Ways and Means Committee in 2023.

Audits found $33.5 million in benefits for 20,878 beneficiaries was redirected through unauthorized direct deposit changes between January 2013 and May 2018, according to Brown. However, another $23.9 million for 19,662 beneficiaries was prevented from misdirection by the agency before payments were made.

The investigation, from a 2019 report, did not implicate undocumented immigrants in that activity.

“Our audits found fraudsters may steal identities to work or to claim earnings-related benefits,” Brown said in his written testimony, which did not give demographic information on those committing the fraud.

There have been cases of undocumented immigrants found to be misusing Social Security numbers to fraudulently access benefits.

“There are certainly some immigrants who are getting benefits when they shouldn’t be, but I think it’s a relatively small group of them,” Watson said.

“This is not a problem that I’ve heard specifically that, as [Vance] says, is widespread,” Biggs said, referring to Vance’s comments about social services fraud by undocumented immigrants.

What happens to unclaimed earnings?

The type of fraud in which Social Security numbers can be misused for work purposes may be more common, experts say.

When someone is working using a Social Security number that isn’t theirs, their earnings may be credited to the person whose name matches that number in the agency’s records.

Alternatively, they may be credited to the Social Security Administration’s earnings suspense file.
The earnings suspense file is an electronic holding file for wage items where names and Social Security numbers on Form W-2s do not match the Social Security Administration’s records, an agency spokesperson said via email.

The wage records stay in that file until they can be verified and matched to a worker’s record. Despite the wage records’ unidentified status, the program’s trust funds have received revenues for the wage items placed in the suspense file, the spokesperson said.

A 2023 report from the Social Security Administration Office of the Inspector General showed the earnings suspense file had accumulated $2.15 trillion in wages for tax years 1937 through 2022.

The earnings suspense file includes undocumented immigrants, among other people, Watson said.
She said the existence of the earnings suspense file “gives you an indication that people are putting into the system and not claiming from the system.”

Immigrants in the labor market ‘very much a positive’

Immigration overall is a net positive to Social Security and Medicare, experts say.

Both programs rely on funding from payroll taxes. The experts say that more immigrants means more workers who contribute to both Social Security and Medicare through their paychecks.

“Immigration, in general, has a very positive role,” said Sam Gutterman, chairperson of the American Academy of Actuaries’ Social Security committee.

Neither the Social Security Administration nor the Department of Health and Human Services, which oversees Medicare, provided recent data on the effect of undocumented immigrants on their programs.

When asked about Vance’s statement that undocumented workers are draining Medicare and Social Security, HHS spokesperson Renata Miller said: “These claims are false and they serve as a distraction from the health care concerns that everyday Americans care about. HHS will continue working to lower health care costs so that patients can fill a prescription without rationing pills or going into medical debt.”

The Social Security Administration in an email explained that there are strict rules about who can legally receive benefits and Social Security numbers.

“The Social Security Act does not permit payment of benefits to noncitizens residing in the U.S. if they’re not lawfully present here,” a Social Security spokesperson said. “In order to get a Social Security number for work, by law you need to be a U.S. citizen or have [Department of Homeland Security] authorization. SSA has stringent evidentiary requirements to confirm the authenticity of documents and prevent issuance of numbers to ineligible individuals.”

In a 2013 report, the Social Security Administration said it is difficult to precisely identify the total amount of taxes paid and benefits that may have been received by unauthorized workers.

In that report, the office of the program’s chief actuary said undocumented immigrants paid as much as $13 billion in payroll taxes to the program’s trust funds in 2010, while about $1 billion in benefit payments were attributed to unauthorized work. That resulted in a contribution of roughly $12 billion to the program’s cash flow that year, according to the agency.

“We estimate that earnings by unauthorized immigrants result in a net positive effect on Social Security financial status generally,” the office of SSA’s chief actuary said.

“We estimate that future years will experience a continuation of this positive impact on the trust funds,” it wrote.

More recently, the Social Security Administration has said immigration tends to be beneficial for the program because those new entrants to the country tend to be working age.

“When they come to the country, they tend to come here for economic opportunity and enter the labor force, and that’s very much a positive,” Stephen Goss, chief actuary of the Social Security Administration, said in testimony before the House Budget Committee in June.

“That actually helps us with having more revenue coming in,” Goss said.

Those workers may eventually work the length of time necessary to qualify for benefits, Goss said.

However, some immigrants pay into the program and never collect benefits, he explained.

And if they have children, that helps to make up for the country’s low birth rate, which also benefits the program, Goss added.

Looming depletion dates are the more pressing issue

In a new report, the American Academy of Actuaries found immigration may “significantly enhance the future financial condition of Social Security, especially in the long term.” The report says immigration may help improve the worker-to-beneficiary ratio and slightly delay the depletion of the program’s trust funds.

However, immigration is “not a silver bullet to ‘solve’ 100% of Social Security’s financial problems,” according to the research, which analyzed the Social Security Administration’s latest annual trustees report.

Both Social Security and Medicare face pressures as the large baby boomer generation retires and taps the programs for benefits.

Absent action from Congress, the trust fund Social Security relies on to pay for retirement benefits is due to run out in 2033, when 79% of benefits will be payable, according to projections from the program’s trustees.

Medicare’s hospital insurance trust fund, also known as Part A, is projected to last until 2036, when 89% of benefits will be payable.

Biggs said the presidential campaigns should focus on policies to address those looming depletion dates that will prompt across-the-board benefit cuts, rather than fraud by undocumented immigrants, which is a much smaller issue for the programs.

Focusing on the undocumented immigrant angle first is a “total sideshow” when it comes to the larger Social Security and Medicare funding issues, Biggs said.

“I think he [Vance] is using it as a deflection because they don’t want to talk about fixing Social Security,” Biggs said.

Personal Finance

There’s a key change coming to 401(k) catch-up contributions in 2025

Published

4 hours ago

October 16, 2024

Business Finance News

Aire Images | Moment | Getty Images

Many Americans face a retirement savings shortfall. However, setting aside more money could get easier for some older workers in 2025.

Enacted by Congress in 2022, the Secure Act 2.0 ushered in several retirement system improvements, including updates to 401(k) plans, required withdrawals, 529 college savings plans and more.

While some Secure 2.0 changes have already happened, another key change for “max savers,” will begin in 2025, according to Dave Stinnett, Vanguard’s head of strategic retirement consulting.

Some 4 in 10 American workers are behind in retirement planning and savings, according to a CNBC survey, which polled roughly 6,700 adults in early August.

But changes to 401(k) catch-up contributions — a higher limit for workers age 50 and older — could soon help certain savers, experts say. Here’s what to know.

Higher 401(k) catch-up contributions

Employees can now defer up to $23,000 into 401(k) plans for 2024, with an extra $7,500 for workers age 50 and older.

But starting in 2025, workers aged 60 to 63 can boost annual 401(k) catch-up contributions to $10,000 — or 150% of the catch-up limit — whichever is greater. The IRS hasn’t yet unveiled the catch-up contribution limit for 2025.

“This can be a great way for people to boost their retirement savings,” said certified financial planner Jamie Bosse, senior advisor at CGN Advisors in Manhattan, Kansas.

An estimated 15% of eligible workers made catch-up contributions in 2023, according to Vanguard’s 2024 How America Saves report.

Those making catch-up contributions tend to be higher earners, Vanguard’s Stinnett explained. But they could still have “real concerns about being able to retire comfortably.”

More than half of 401(k) participants with income above $150,000 and nearly 40% with an account balance of more than $250,000 made catch-up contributions in 2023, the Vanguard report found.

Roth catch-up contributions

Another Secure 2.0 change will remove the upfront tax break on catch-up contributions for higher earners by only allowing the deposits in after-tax Roth accounts.

The change applies to catch-up deposits to 401(k), 403(b) or 457(b) plans who earned more than $145,000 from a single company the prior year. The amount will adjust for inflation annually.

However, IRS in August 2023 delayed the implementation of that rule to January 2026. That means workers can still make pretax 401(k) catch-up contributions through 2025, regardless of income.

Roth conversions on the rise: Here's what to know

Personal Finance

Holiday shoppers plan to spend more, while taking on debt this season

Published

6 hours ago

October 16, 2024

Business Finance News

Increase in consumer holiday spending expected this year, says Mastercard's Michelle Meyer

Americans often splurge on gifts during the holidays.

This year, holiday spending from Nov. 1 through Dec. 31 is expected to increase to a record total of $979.5 billion to $989 billion, according to the National Retail Federation.

Even as credit card debt tops $1.14 trillion, holiday shoppers expect to spend, on average, $1,778, up 8% compared to last year, Deloitte’s holiday retail survey found.

Meanwhile, 28% of holiday shoppers still haven’t paid off the gifts they purchased for their loved ones last year, according to another holiday spending report by NerdWallet.

How shoppers pay for holiday gifts

Heading into the peak holiday shopping season, 74% of shoppers plan to use credit cards to make their purchases, NerdWallet found.

Another 28% will tap savings to buy holiday gifts and 16% will lean on buy now, pay later services. NerdWallet polled more than 1,700 adults in September.

Buy now, pay later is now one of the fastest-growing categories in consumer finance and is only expected to become more popular in the months ahead, according to the most recent data from Adobe. Adobe forecasts BNPL spending will peak on Cyber Monday with a new single-day-record of $993 million.

However, buy now, pay later loans can be especially hard to track, making it easier for more consumers to get in over their heads, some experts have cautioned — even more than credit cards, which are simpler to account for, despite sky-high interest rates.

The problem with credit cards and BNPL

To be sure, credit cards are one of the most expensive ways to borrow money. The average credit card charges more than 20% — near an all-time high.

Alternatively, the option to pay in installments can make financial sense, especially at 0%.

And yet, buy now, pay later loans “are just another form of credit, disguised as something for free,” said Howard Dvorkin, a certified public accountant and the chairman of Debt.com.

The more BNPL accounts open at once, the more prone consumers become to overspending, missed or late payments and poor credit history, other research shows.

If a consumer misses a payment, there could be late fees, deferred interest or other penalties, depending on the lender. In some cases, those interest rates can be as high as 30%, rivaling the highest credit card charges.

“This is just another way for financers to put their hands in the pocket of consumers,” Dvorkin said. “It’s a trojan horse.”

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Personal Finance

Here’s why the U.S. retirement system isn’t among the world’s best

Published

9 hours ago

October 16, 2024

Business Finance News

Mixetto | E+ | Getty Images

The U.S. retirement system doesn’t get high marks relative to other nations.

In fact, the U.S. got a C+ grade and ranked No. 29 out of 48 global pension systems in 2024, according to the annual Mercer CFA Institute Global Pension Index, released Tuesday. It analyzed both public and private sources of retirement funds, like Social Security and 401(k) plans.

A similar index compiled by Natixis Investment Management puts the U.S. at No. 22 out of 44 nations this year. Its position has declined from a decade ago, when it ranked No. 18.

“I think [a C+ grade] would describe a rating where there is a lot of room for improvement,” said Christine Mahoney, global retirement leader at Mercer, a consulting firm.

The Netherlands placed No. 1, followed by Iceland, Denmark and Israel, respectively, which all received “A” grades, according to Mercer. Singapore, Australia, Finland and Norway got a B+.

Fourteen nations — Chile, Sweden, the United Kingdom, Switzerland, Uruguay, New Zealand, Belgium, Mexico, Canada, Ireland, France, Germany, Croatia and Portugal — got a B.

CNBC Retirement Survey: 44% of workers are 'cautiously optimistic' about reaching retirement goals

Of course, retirement systems differ since they address a nation’s unique economies, social and cultural norms, politics and history, according to the Mercer report. However, there are certain traits that can generally determine how well older citizens fare financially, the report found.

The U.S. system is often referred to as a three-legged stool, consisting of Social Security, workplace retirement plans and individual savings.

The lackluster standing by the U.S. in the world is largely due to a sizable gap in the share of people who have access to a workplace retirement plan, and for the ample opportunities for “leakage” of savings from accounts before retirement, Mahoney said.

Employers aren’t required to offer a retirement plan like a pension or 401(k) plan to workers. About 72% of workers in the private sector had access to one in March 2024, and about half (53%) participated, according to the U.S. Bureau of Labor Statistics.

“The people who have [a plan], it’s probably pretty good on average, but you have a lot of people who have nothing,” Mahoney said.

By contrast, some of the highest-ranked countries like the Netherlands “cover essentially all workers in the country,” said Graham Pearce, Mercer’s global defined benefit segment leader.

Additionally, top-rated nations generally have greater restrictions relative to the U.S. on how much cash citizens can withdraw before retirement, Pearce explained.

American workers can withdraw their 401(k) savings when they switch jobs, for example.

About 40% of workers who leave a job cash out “prematurely” each year, according to the Employee Benefit Research Institute. A separate academic study from 2022 examined more than 160,000 U.S. employees who left their jobs from 2014 to 2016, and found that about 41% cashed out at least some of their 401(k) — and 85% completely drained their balance.

Employers are also legally allowed to cash out small 401(k) balances and send workers a check.

While the U.S. might offer more flexibility to people who need to tap their funds in case of emergencies, for example, this so-called leakage also reduces the amount of savings they have available in old age, experts said.

“If you’re someone who moves through jobs, has low savings rates and leakage, it makes it difficult to build your own retirement nest egg,” said David Blanchett, head of retirement research at PGIM, Prudential’s investment management arm.

Social Security is considered a major income source for most older Americans, providing the majority of their retirement income for a significant portion of the population over 65 years old.

To that point, about nine out of 10 people aged 65 and older were receiving a Social Security benefit as of June 30, according to the Social Security Administration.

Social Security benefits are generally tied to a worker’s wage and work history, Blanchett said. For example, the amount is pegged to a worker’s 35-highest years of pay.

While benefits are progressive, meaning lower earners generally replace a bigger share of their pre-retirement paychecks than higher earners, Social Security’s minimum benefit is lesser than other nations, like those in Scandinavia, with public retirement programs, Blanchett said.

“It’s less of a safety net,” he said.

“There’s something to be said that, as a public pension benefit, increasing the minimum benefit for all retirees would strengthen the retirement resiliency for all Americans,” Blanchett said.

That said, policymakers are trying to resolve some of these issues.

For example, 17 states have established so-called auto-IRA programs in a bid to close the coverage gap, according to the Georgetown University Center for Retirement Initiatives.

These programs generally require employers who don’t offer a workplace retirement plan to automatically enroll workers into the state plan and facilitate payroll deduction.

A recent federal law known as Secure 2.0 also expanded aspects of the retirement system. For example, it made more part-time workers eligible to participate in a 401(k) and raised the dollar threshold for employers to cash out balances for departing workers.