Chapter 1 Introduction Earnings Reporting and Crediting Processes Earnings in Social Security-covered employment enable an individual to build sufficient credits, called quarters of coverage, to gain eligibility for Social Security benefits. Once sufficient quarters of coverage are earned and retirement, survivors, or disability conditions are met, SSA uses the amount of earnings to calculate an individual's benefit. Employers report earnings of employees directly to the Social Security This review assesses the effectiveness of the process designed to ensure that employees receive credit for their earnings in their Social Security accounts. It also examines and measures-for some employees and selfemployed the impact of uncredited earnings on Social Security benefit payments and on Social Security's trust funds. SSA annually receives more than 8 million summary employers' earnings reports; that is, employers annually report to SSA summaries of all employees' earnings on a form called a W-3 and provide each employee's earnings (form W-2, Wage and Tax Statement) up to a yearly maximum amount. Employers also file with IRS quarterly tax reports (form 941, Employer's Quarterly Federal Tax Return, or a similar form) of total employees' earnings and pay all taxes due, including Social Security taxes. SSA checks the identifying information on each W-2, such as name and There are about 9.5 million self-employed who report their earnings directly to IRS, as part of their tax returns. IRS then provides the earnings When we differentiate between earnings of employees and the self-employed, we use the term "wages" for employees and "self-employment earnings" for the self-employed. Introduction Assuring Credit for and identification data to SSA. If SSA cannot match the identification data with its records, the data are placed in a self-employment suspense account file, pending resolution. As of October 1986, that file included about $6.5 billion in unresolved earnings (a small percentage of all creditable self-employment earnings). Some of these earnings have been in SSA's file since self-employment earnings were first recorded in 1951. Earnings reported by employers to SSA Serve as the basis for determining the amount of tax revenues to which the Social Security trust funds are entitled. The amount is meant to be determined by applying tax rates to earnings that SSA Certifies are recorded in its records (both individuals' accounts and the suspense account file). In practice, the Department of the Treasury transfers tax money to the Social Security trust funds throughout the year, based on the earnings reported quarterly by employers to IRS. After transfer, the taxes are used to pay Social Security benefits to eligible individuals or their survivors. Currently, there are two primary ways individuals and SSA can detect whether earnings were not credited to individuals' Social Security accounts. First, individuals can (and are encouraged by SSA through various public information media to) request a record of their earnings to check their own Social Security accounts for earnings and quarters of coverage. Individuals sometimes check their earnings while still working; others check when applying for benefits. Individuals who find that earnings were not correctly credited can submit acceptable evidence of these earnings, such as a statement signed by the employer, a W-2, or pay slips, and have their accounts adjusted. Second, IRS identifies employers who may not have reported some or all employees' earnings to SSA. IRS does this by comparing its total of employers' earnings for employees with SSA's total. IRS then identifies specific employers' earnings reports that indicate an employer either may not have reported (1) missing reports (no earnings recorded by SSA for a specific employer identification number [EIN]) or (2) discrepant reports (some earnings recorded by SSA for a specific EIN, but the amount is less than that recorded by IRS).2 In this way, employers with potential reporting problems are identified and can be contacted by either SSA or IRS to pinpoint what may not have been recorded correctly. The reporting and reconciliation processes are shown in figure 1.1. 2IRS also identifies employers who may not have reported or incorrectly reported earnings to IRS. These cases are not referred to SSA and were not a part of our review. Objectives, Scope, and The objectives of our review were to (1) determine how SSA ensures that individuals' earnings are properly credited to their Social Security accounts and (2) measure the effect of uncredited or erroneously credited earnings on individuals' Social Security benefits and eligibility and on the Social Security trust funds. During our review we also sought to (1) determine the reasons that earnings differences were not being resolved and (2) learn more about the underlying causes for these differences. In order to achieve these two goals, we examined data SSA had |