Thursday, April 30, 1998

Privatizing Social Security - A Dissenting View

I read with interest Michael Tanner’s essay published in the Outlook Section of The Washington Post, March 22, 1998. Mr. Tanner does an excellent job in highlighting the difficulties facing the Social Security program in the very near future. He is right on in his suggestion that the program must be privatized to assure the next generation of a comfortable retirement. However, I quarrel with the way in which he suggests we do it. The creation of a central fund which operates like a 401(k) provides too great a temptation to the Ted Kennedys, Dick Armeys and Randall Terrys of the world to engage in industrial and social policy with the leverage that such a fund will provide. Additionally, the reliance on a subsidy program to supplement the incomes of those who make too little to retire comfortably turns a jointly held retirement insurance plan into a stock fund cum welfare plan, violating the norms which led to the original success of the program. This uncovers the dilemma of privatizing Social Security, how do you turn the program over to private hands while at the same time duplicating its success in eradicating poverty with dignity and preventing the abuse of the funds saved?

The success of Social Security comes from the averaging of low and high income donations into a common pool, such that all retirees who contribute the required number of quarters receive a benefit based on their earnings with a minimum for those who work the minimum number of quarters, provided they retire at age 65 (or 67 for my generation). While this raises objections in some quarters, it is, none-the-less, a matter of fact. Any replacement program must duplicate this averaging effect or live with the resulting poverty and need for subsidies. Without this effect, no privatization will survive the legislative process and will fail in implementation.

The best way to prevent the abuse of funds in a privatized program is employee control. For small firms, employees will contribute to a central fund and chose a variety of fund options, in the same way many 401(k) plans work. Larger firms offer a more interesting alternative, the investment of all funds in the voting stock of the employer. This will lead to employee ownership of most large firms. Indeed, employee control of large firms will force small firms to offer stock as well, as the market for employees shifts expectations. The implications of this approach will be discussed later. First, two alternative plans for privatizing Social Security will be outlined.

The first plan duplicates the averaging effect of Social Security in the private sector. It is the pure alternative, which means it has no chance of passage in the current political climate. The keystone of this plan is that each employee will receive the same contribution for retirement, regardless of income, which will fund the purchase of stock, a qualified 401(k), or some combination of the two, at the employee’s option. Such a program can be implemented, after the transition period, without additional employer cost. Wages subject to the payroll tax will be decreased by the amount subject to tax, with those amounts and the matching contribution pooled among all employees and paid out to each equally (adjusted by full-time and part-time status). The reason this will never pass is because, although socially just, it goes against what most people would expect, especially the majority party in Congress.

The second plan is a hybrid of Mr. Tanner's plan and the first plan. Employees will continue to pay at least a 6.2% share, which will (as above) go to the purchase of company voting stock, a qualifying 401(k) plan, or some combination of the two at the choice of the employee. In view of the upcoming actuarial short-fall, an 8% employee share is recommended. Most employees, especially those in Generation X, will find this acceptable, given that the funds are held in stock or in a presumably secure and insured 401(k). The removal of the income cap on the employee side is also feasible under this plan. The employer component is similar to the first plan, found above. Each employee will receive an equal contribution, based on the average of all employee contributions. This preserves, to a great extent, the averaging effect of the current program, and is key to its success and its passage.

During program phase-in, most employer contributions will go to current retirees. However, instead of cash payments, all retired or separated workers will receive stock or 401(k) contributions, financed by payroll tax prepayment bonds covering the expected contributions under the current payroll tax, through retirement, of all current employees. This will allow quick conversion, with bonds maturing as current employees retire. Removal of the income cap on the employer side will hasten conversion.

Both plans encourage employee ownership, which will help lead to the demise of minority business set-aside contracts. These programs require minority ownership and management, which flies in the face of equal opportunity for all employees, unless discrimination in hiring is mandated. In both the long and short-term, employee ownership of all funds is the best form of affirmative action, as all employees will benefit, rather than those select few who know how to game the system.

Temporary employees also present special problems, as most temp firms provide mostly low-wage jobs when compared to the aggregate economy. To overcome this difficulty, the client will be required to make the employer contribution for all such employees who are employed for over three months on a lifetime basis. (Health insurance should also be provided by the client to such employees). This will probably discourage the use of such long-term arrangements. Many Generation Xers, having spent significant time in temporary employment, will shed no tears for the loss to society of such exploitation.

Both plans will lead to true employee-ownership of stock-based companies. Currently, many so-called employee held firms are top heavy, with most of the benefits accruing to longer term, higher-wage professionals and managers. The approach suggested here will drive those benefits down to the employee level. The libertarian and privatization movements have long limited themselves to opposing government action. Such a stand is incomplete unless the concentration of wealth and power in the private sector is also opposed. As students of history know, the rise of government regulation originally came about because of this concentration of private wealth and power in the gilded age. Subsequently, many of the regulators were captured by these same interests, using regulation to legitimize their position. We must be careful, as we seek to dismantle government, that we protect the interests of the worker and the consumer. It does no good to throw off government tyranny if it is to be replaced with private tyranny.

A move to true employee-ownership offers profound secondary benefits to society. Productivity will increase sharply, as employees discover they are the beneficiaries of such gains. Movements such as Total Quality Management, which drives responsibility to the lowest level, will gain credibility with employees. Occupational safety will become less of a concern, as employee-owners will insist on a safe work environment. The nature of unions will change, as organized workers seek partnership with management and professional employees. Consumer protection and long-term investments in technology, plant and equipment and human capital will occur more readily, with future retiree-owners building companies to endure for the sake of their own security. In short, the need for government regulation goes away. Wage levels will flatten, with premium wages will be reserved for innovation rather than position, leading further scientific and technical advances and melting the resistance to a flat tax.

Monday, April 20, 1998

The Liability of Households for the U.S. National Debt

This essay is in response to Joe DioGuardi's analysis of what each taxpayer owes for the national debt [Debt is Making Us Poor The Washington Post - April 20, 1998]. His analysis assumes that each man, woman and child owes the same amount of the national debt. Yet his own 'Credit Card Statement' points to the inconsistencies in his argument. Individual payments received vary widely among individuals, largely due to their incomes. Even the 'citizen share' of the corporate income tax reflects income as it relates to the cost of goods consumed. On the purchase side, most households receive nothing from Social Security, Medicare, Health, Income Security and Welfare in any particular year. The whole point of such programs is that they are tailored to individual circumstances. National defense and agriculture benefits may be shared at the macro level, yet even these benefit certain households more than others. I can testify to this as the child of a defense worker.

Mr. DioGuardi's assumptions would be correct if government operations were financed with a head tax (each citizen pays an equal amount). However, such is not the case. Taxation of individuals at the federal level is by personal income. The nation's ability to borrow at the level at which we do is based largely upon this tax, as social insurance taxes cover social insurance payments.

The National Debt is roughly 9 times the amount of revenue raised annually by Personal Income Taxes. Therefore, to calculate what an individual or family owes, multiply their annual tax bill by 9. The attached illustrate approximately how this looks for various income levels for single filers and families of four married filing jointly.

These tables show why wealthy Americans, including the sponsors of such organizations as Truth in Government, favor spending cuts over progressive income taxes. Individuals who owe more under these calculations than the per capita amount will prefer spending cuts because spending cuts, in general, fall more evenly on the entire population. As their preferred spending cuts are on poverty programs, the cuts they want affect them less. They do not like defense cuts, because defense spending often favors them with higher salaried defense jobs. Progressive income tax increases, on the other hand, fall upon them more heavily.

Of course, to change this tax reform is necessary. The Committee’s favored approach is to replace corporation income taxes (formerly the corporate profits tax) and all personal income tax revenue taxed at the 31% rate or below with a business income tax at a single rate, which would cover all spending save net interest and old age and survivors insurance, and to retain personal income taxation on all income currently taxed at the 36% rate and above, dedicating this revenue to the payment of net interest and debt retirement. This would make the wealthy solely responsible for the national debt.