Probably known and understood less than the infield fly rule1 are the federal government’s bilateral tax arrangements with 21 other nations called “social security totalization agreements.” Totalization agreements are not new - the first between Italy and France was effective in 1919; the first for the US was effective in 1978. The 21 agreement partners2 - Canada, Chile and the industrialized nations of Western Europe and Asia - are economically well-developed, wealthy, and, except for Canada, distant nations with significant transfers of workers to and from the US and comparable social security schemes. Mexico, with whom an agreement was signed in mid-2004, would be the first with a nation that provides such economic disparity, proximity and 70 percent of the US’ illegal immigrants.

The Mexico agreement is awaiting further required steps and, hopefully, resolution of several important questions before enactment. The constitutionally dubious process of review of totalization agreements is more roundabout than usual: the next step is for President Bush to sign, after which either house of Congress has 60 legislative days to object, absent which the agreement becomes effective, subject to Mexican Senate approval. The Congress has never before objected, and a 1983 Supreme Court decision3 exacerbates the objection process by likely rendering it unconstitutional because of flawed compliance with the separation of powers requirement.

Totalization agreements are attempts at fairness for persons who work extensively in 2 or more countries during their careers, bear significant payroll taxes, but either fall short of reaching the minimum period of work to qualify for retirement benefits or qualify for lesser benefits. Because the US taxes its citizens on their global (rather than territorial) activity, double Social Security taxation of the same income by both countries (work location and the US) often results. Totalization agreements eliminate double taxation by ceding taxation to the country of employment. They also reduce benefit gaps by permitting “totalization” of coverage periods in both countries. Existing agreements are estimated4 to save US employers and employees $ 800,000,000 per year in foreign payroll taxes and save foreigners $ 200,000,000 annually in US payroll taxes.

US Social Security law denies benefits to illegal immigrants even if their wages were subjected to US payroll tax. It clearly so states; but the growing concern is that a guest worker program, if enacted, could contain amnesty and/or citizenship provisions that would supersede current law and allow former illegal immigrants from totalization agreement countries to include US wages received before their US legal residency in their benefit eligibility and amount calculations. A Social Security Administration (“SSA”) official has denied the likelihood of this effect - an empty assurance for legislation not yet written. The key simply will turn upon whether the agreement and any changes to immigration law override US law.

The US signed the agreement after what was criticized as inattentive due diligence. SSA actuaries offered laughably unrealistic cost assumptions based upon facts pertaining to Canada- only 50,000 Mexican workers initially would be covered with no illegals. For comparison, Canada recently5 had 821,000 citizens in the US of whom 47,000 were here illegally while Mexico had 9,177,000 of whom 4,808,000 were here illegally (now thought to approximate 7,000,000.) The non-partisan Government Accountability Office (GAO) criticized the highly favorable SSA cost assumptions and considered even a 25 percent variation (most have been much greater) in participants likely to have a “measurable impact” upon the Social Security trust fund balances. GAO characterized SSA’s practices as without “written policies or procedures it follows when entering into totalization agreements, and the actions it took to assess the integrity and compatibility of Mexico’s Social Security system were limited and neither transparent nor well-documented.”6 Laxity here seems unwise.

Further, differences between the US and Mexican retirement requirements (10 years of work and generous pensions usually far greater than taxes paid versus 24 years of work and a pension equal only to taxes paid plus interest) make the US a magnet for continued attraction of Mexican workers. It would become a far greater magnet with an agreement in place that reduces to 1.5 years from 10 the minimum US work requirement, and eliminates prohibitions of benefits to spouses and children who have not lived in the US for 5 years.

The fuzzy, imprecise provisions of the guest worker program being discussed by Bush, the Congress and others contain amnesty concepts that lead to fear that the potential transformation into benefits from earnings while illegally here could be ruinously costly to the US Treasury. Thoughtful policymakers are nearing apoplexy and have begun to blog daily against the Mexican agreement. They can see elements at work of the “starve the beast” ideas of the tax cut crowd, and are especially concerned with the now-Democratically controlled Congress, the views of the Catholic Church, and President Bush’s perceived need for a positive Latin American initiative. A large bloc of voters seems to be in the balance.

These questions are too important and potentially costly to have their resolution left to chance: judicial review of scant legal authority, likely unconstitutionality of a Congressional rejection under current law, or the effects of future immigration or Social Security law changes. Bills7 currently in the Congress, which require affirmative review by both houses before enactment, should be passed swiftly before a likely presidential signature jeopardizes certainty and rationality.

(c) Paul H. Johnson.
Johnson is a tax lawyer and CPA in practice in Fort Worth.

Notes:

1. Official Rules of Major League Baseball, Rules 2.00 and 6.05.
2. The US’ agreement partners are: Australia, Austria, Belgium, Canada, Chile, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Portugal, South Korea, Spain, Sweden, Switzerland and the United Kingdom.
3. INS v. Chadha (462 U.S. 919 (Sup. Ct., 1983), relating to a similar provision in the Immigration and Nationality Act.
4. Report of Committee on Ways and Means, House of Representatives, July 7, 2004.
5. GAO Analysis of Totalization Agreement with Mexico, 2003 (statistics are for the year 2000)
6. ibid
7. S. 43 and H.R. 279, “Social Security Totalization Agreement Reform Act”