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June 17, 2004
Pay Me My Money Down!
I've been hesitant to post this message for awhile, as I have been unable to satisfy my own background checking on it. I'm posting it now in hopes that someone else might be able to answer the general thoughts, and so that I may at some point revisit the discussion.
The topic of the tech industry off-shoring jobs has come up more frequently in conversations as of late. Typically they revolve around the previous generation (those getting ready to retire) informing me that I should be more active in keeping the jobs from disappearing, asking how the companies can do this, and really why it's happening. Not necessarily in that order, but I'll assume you can gather the natural progression of the conversation from it.
Not to sit here and rehash many of the points again but the general gist looks like so (if you've been completely out of touch with society):
Why is it happen? Because there is the belief that it is cheaper. While short run statistics provide proof of this, long term has yet to be determined. (Who can buy your $500/$1000 product if that is a 1/10th of their income?)
How can they do it? Well, various rules and regulations passed over the years have allowed the market to open up.
The next point is the one I don't understand. I am rather surprised at the short sighted view about this problem many have. It is not my generation that should be fighting this trend most vocally, as we are still mobile and able to navigate the retirement sea, but rather the previous generation of soon to be retirees. Why? Social security.
What is Social Security?
An idea that the government will help elderly citizens after retirement to have some type of income. In it's original form, the idea was good, but has been unable to sustain itself. As it works now, each generation pays to keep the lasts social security working. This money is automatically taken from every eligible citizen (with a few odd exceptions) at a rate of ~6%. Many of those in my generation are not expecting social security to provide any kind of support, and have begun utilizing IRAs, 401K/403Bs, and various other means to prepare for retirement. Even the SSA expect there to be a 27% drop in pay-outs after 2040, an increase in eligibility age, and hints that this isn't going to work.
What does any of this have to do with off-shoring? Part of the advantage of off-shoring a jobs is the reduced wages due to differences in cost of living. The half part comes from the point that many of these jobs are now moved to consulting positions rather than full time employees. As I understand it, a company is not required to deduct social security taxes from an employee who not a member of the company, thus providing a company a means with which they may avoid contributing as much to the SSA. As such an employee, each new position overseas will no longer be adding any portion of their income to the collective social security pot causing SSA to miss two tax forced donations. My generation is young and mobile enough to compensate for this potentially huge pay-out change, provided it is recognized, but many in the soon to retire bracket will not be fortunate enough or possibly even prepared for such a circumstance. How many will be affected? Thats unknown for sure.
For the sake of discussion, let us assume for a moment though that I am wrong on the above statement. That each employee of an off-shored position is not brought in as a consultant, but rather a full-fledged employee of the company paying American taxes on these dollars earned. Average income reports have suggested the range is anywhere within the 10-20,000USD range, with more leaning towards the 12,000USD range. Taking out six percent from 20,000 plus another 1% paid by the company, is really going to have a non-effect for sustaining the SS pay-outs. The cost of living in the US pretty much prohibits this kind payment.
My hesitation in posting this comes from the fact that I don't know the taxation laws (obviously), nor the intimate details of offshore employment. After having spent numerous hours online looking for information on it, talking with various people about it, even trying to call the SSA I've come to the conclusion that no one really knows for sure which way it works. If anyone can correct me where I am wrong, it would be a good thing. As I see it now though, the soon to retire generation is about to lose without realizing it.
So I ask again, why am I the one that needs to fight so hard?
Posted by Dan at June 17, 2004 12:55 AM
Comments
From my experience in hiring, managing and working with off-shore employees (granted at a relatively small scale compared to the IBMs, Ciscos and Yahoos) I have seen that you will typically hire a company for services, and they will provide you a number of bodies. These bodies are employees of that company and get paid by them based on their country of origins taxation laws. So none of their paycheck makes its way back to any of the US coffers.
However, often for reasons of prudency the company you will pay for the services is US based or at least has some level of US operations. That provides you at least with a level of protection afforded by US law if the company were to renege on the contract. So I imagine that the money this company takes in does get taxed at some level, however I am sure that the money taxed there is business income and has nothing to do with the Social Security funds.
By the way, you mention (a few odd exceptions) of paying into Social Security. (if you know) How do I qualify? And how do I make them give me the money they took from me at gun point? I'd even be happy to let my original employers have their matching contributions back if I could recover the money that was taken from my paycheck. That chunk of money they have been taking from me since I was 16 would go a long way to fattening out my IRA.
Posted by: Kevin at June 17, 2004 07:27 AM
The odd exceptions mentioned can be found on the social security administrations web page, but to make you life a little easier they include:
1) Being a federal employee fully employed before 1984, when it was optional to take part in SS.
2) A self employed person who makes net earnings of less than $400 a year. If I follow the rules correctly though, it looks like if you make a net of over $87,000 a year as well you may not have to pay SS, just Medicare at 2.7%.
3) Members of some religious groups may qualify for exemptions from SS taxation, but it requires waving their rights to any benefits.
Your best bet to try to recover any wages paid and to discontinue payment towards it is to file an IRS Form 4029 (Application for Exemption From Social Security Taxes and Waiver of Benefits). Be forewarned that the IRS makes any and all decisions on this, not the SSA.
I'm not completely sold on an off-shore consultant having some monetary tie back to the US. It sounds like it could happen, yes, but it doesn't seem as if such a maneuver will pay off for the off-shore company.
Posted by: Dan Kalowsky at June 17, 2004 09:16 AM
I'm not an expert on the subject, but I believe the $87000 cutoff just implies that you don't pay the 6% on income earned that exceeds that amount - if you make $100k you still pay 6% of $87k.
Another comment: I expect a good portion of outsourcing comes from ways that may avoid having to pay social security tax. I doubt that contracting companies such as those that pay slave/child laborers in islands in the far east need to pay social security. I also doubt that US social security is paid by the employees of Microsoft's China division or IBM's India division - because it wouldn't even make sense.
In general response, I agree with you completely. There is a good chance (increasing with every successive Republican administration, it seems) that we just won't have enough money to pay the social security of these people. We youth, by and large, don't trust the government to take care of us, while there are a lot of people who do, and who don't seem sufficiently concerned by ongoing fiduciary mismanagement.
Posted by: Chris Riley at June 17, 2004 09:53 AM