Social Security has big impact on small business economy

Friday, April 22, 2005

The self-employed make up a significant part of the U.S. economy. According to a study released by the U.S. Small Business Administration's office of advocacy, the self-employment rate in 2003 was 9.8 percent of the total labor force. This represents over 12.2 million, half of the total small-business population. The self-employed are clearly at the heart of the American economy, and their financial health is central to our country's economic progress.

Individual wage and salary workers pay 6.2 percent of their wages in payroll taxes to fund Social Security benefits for current retirees. Taxes paid by their employers match those amounts. When they retire, these employees expect that the payroll taxes on future workers and employers will fund their promised Social Security benefits.

The self-employed pay the full 12.4 percent Social Security payroll tax, because they are rightly considered both the employer and employee.

According to the National Association for the Self-Employed, more than 65 percent of 14- to 19-year-olds want to start a business. Do they realize that the Social Security system will be bankrupt nine years before they retire? If that is not a wake-up call for reform, how about explaining to young entrepreneurs that one-eighth of the money they earn goes into Social Security and, despite making decisions that mean survival or death for their own business, they cannot decide what happens to that money once they retire.

This looming Social Security crisis will affect a flood of entrepreneurs because the path of self-employment is being traveled by more and more people anxious to be their own boss.

From 2000 to 2003, self-employment increased by 6.2 percent. Tracking population increases, Latino entrepreneurs topped 1 million in 2003. African Americans and Asians also achieved sharp increases, according to data from the Bureau of Labor Statistics' Current Population Survey program.

President Bush's plan to reform Social Security calls for a portion of payroll taxes to be voluntarily set aside into personal retirement accounts. The concept of personal accounts mirrors the American dream of owning a business. A personal account, as part of Social Security reform, would allow the self-employed to make decisions about their savings. Personal accounts would allow for the self-employed to reinvest in their businesses for growth or to ensure that the business passes along to the next generation.

The importance of personal accounts is amplified by the limited retirement savings options for the self-employed. The double payroll tax puts small-business retirement plans out of reach. An increased payroll tax eats up money that could go to IRAs or Keogh accounts. By crowding out the funds needed for retirement savings, the burden of the double out-of-pocket payroll tax reduces the likelihood that small businesses will have a separate retirement plan.

According to the Employee Benefit Research Institute, in 2003 more than 50 percent of small business owners had either never heard of or had only vague familiarity with small-business retirement plans. The only retirement savings vehicle that they had a high degree of familiarity with was the 401(k) program, which is often too costly for the self-employed to administer.

Without reform, perhaps sons and daughters of entrepreneurs should tell their parents to get out of the self-employed business. Perhaps children who grow up admiring their small-business moms and dads should tell them to quit, because one-eighth of the money their parents earn is put into a Social Security system that prevents re-investment and prevents the business from passing from one generation to the next.

Or, perhaps the 214,000 self-employed in Missouri and their families will rise up, take pride in their enormous contribution to the economy and insist that personal accounts remain a part of Social Security reform.

Wendell Bailey of Kansas City is the regional advocate for the U.S. Small Business Administration. He served as Missouri's state treasurer from 1985 to 1993.