NY25-06: Cash Is King: Effects of Un(der)reported Income on the Social Safety Net

Based on the estimated size of the shadow economy, 11 million workers are paid partly or all in cash. Payment in cash, meaning any form of liquid currency including physical money and funds linked to apps, leads to under-reporting income and not paying F.I.C.A. taxes, which hinder accumulation of Social Security credits and delay age of vesting for Social Security benefits (Auten and Langetieg 2023, Smith Nightingale and Wandner 2011). Those who do not report earnings on W-2 or 1099 federal wage and tax statements forgo other advantages of formal employment: wage and hour regulation protection, unemployment, disability, worker compensation insurance, access to employer-provided health insurance and the Earned Income Tax Credit (EITC). The EITC was partly intended to incentivize workers to get “on the books” so their pay is counted towards Social Security eligibility and vesting. If workers persist in being paid in cash, that means EITC’s incentives have partly failed to get more people covered by social insurance, especially SSI, Social Security (OASI) and Medicare. 

 Hispanic/Latino workers are particularly at risk of vesting late for Social Security benefits or not vesting at all. Latinos are overrepresented in sectors that lend themselves to cash pay and under-reporting: small enterprises and farm work, construction, and services such as landscaping, house cleaning, hairdressing and home health care, all of which may use contingent labor (Dubina 2021, Batalova 2024). The proposed mixed-methods study examines the impact of cash work and income under-reporting on the retirement security of Latinos. We will investigate how Latino entrepreneurs and workers obtain knowledge about Social Security and the EITC, how they make decisions to under-report pay, who makes the decisions, and what barriers they face if they want to be paid formally or “on the books.” We aim to measure the adverse effects of under-reporting income and evaluate how workers, and perhaps owners of small business’ behavior would change if they better understood the benefits of reporting income.