The Generation X Committee on Social Security, Tax Reform and Economic Justice believes that a piecemeal debate on Social Security reform alone, tax reform alone, Medicaid alone or Medicare alone will result in solutions which will neither work nor pass. Currently, there are separate discussions of each of these issues. To make progress on these issues, they must be considered together. Additionally, to guarantee a decent retirement for both the Baby Boom and Generation X, more must be done now to grow the economy for younger Americans, so that they can afford to have larger families and greater life-time earnings than are currently projected and thus support the size of the anticipated retirement population.
We welcome the introduction of the President's proposals to save Social Security and Medicare. They provide a useful counter-point to the Cato Institute's push for privatization. The inclusion of redistributional elements in the proposed Personal Investment Accounts sends a key signal to those who would privatize the entire program. To wit, no social security privatization which attempts to overturn the redistributional nature of the program will ever pass. This is a good bottom line for any debate on this issue.
The Cato Institute's response to the Personal Investment Accounts is that they open the door to eventual privatization of the entire system. We agree. Pandora's Box has been opened. If these accounts pass, even as a supplement to the current system, full privatization will eventually result. However, a fully privatized program will look more like the system which is described below than the Cato proposal.
In addition to the redistributional elements mentioned above, we believe that once privatization is inevitable, organized Labor will insist that individual accounts for union members be managed as part of their pension fund system. It is our hope that in doing so, unions focus on investment in the firms for which their members are employed, changing the incentives for both labor and management in the collective bargaining process. Such a paradigm of employee-ownership will attract workers to the union movement and begin a renaissance in the American workplace.
We suspect that the President's proposal to reserve the surplus for Social Security and Medicaid is a way around restructuring the tax system, i.e., raising the income limit and increasing Medicare taxes, which would lead the Congress to a lowering of the general tax rates in a way which favors the well-off. Such a debate would lead to a generalized discussion on tax reform, which the Committee welcomes.
We believe that only a global approach will result in the comprehensive reform needed to assure the baby boom generation of a sound retirement without breaking the bank and the backs of the succeeding generations, especially Generation X and those at the tail end of the Baby Boom. The Committee has identified the following ground rules to focus the debate on Social Security and Tax Reform.
1. Any comprehensive reform must result in the retirement of the debt held by the public by the year 2040, if not before.
2. Any privatization or partial privatization of Social Security must duplicate the redistributional effects of the current system, i.e., individuals who are subsidized in retirement must be subsidized at the investment stage. Social Security works because it operates under the myth that benefit payments are not welfare. Initiating a needs based subsidy for some retirees adds the stigma of welfare, which will lessen program participation and throw some seniors into poverty.
3. Any privatization of Social Security must be economical, with low administrative costs. Additionally, if possible, employee stock ownership and voting control must be a component of the system.
4. Any comprehensive health care solution must address the problem of the uninsured and must eliminate waste from the system, without compromising the quality of care. Any further Medicare and Medicaid reforms must include measures which spread cost savings to the general population, as it is markedly unfair to taxpayers with surviving parents to bear the risk of Medicare and Medicaid system failure while taxpayers whose parents have passed incur no additional burden.
5. Any tax reform must simplify or eliminate compliance for individual middle class taxpayers and must retain some form of progressivity, with the top wage earners in the current 36% and 39.6% brackets continuing to pay a higher rate than the general population.
6. Any general budgetary reform must eliminate incentives for wasteful spending and tax breaks targeted at industries favored by narrow interests at the expense of the rest of the nation. However, certain tax benefits must still be maintained and strengthened, including tax advantages for child rearing, home ownership, health insurance and education/training of the young. Such tax advantages are necessary for the preservation of the family. If high enough tax benefit levels are set, abortion can be eliminated through economic incentives, rather than punitive measures against women and doctors which some still desire to attempt.
Adoption of these ground rules will result in reform which benefits all segments of society and will lift up the poor and the young, rather than favoring solely the connected and the powerful in hope that benefits will then trickle down.
The Committee's proposed solution will now be described. The following summary table will be followed by a description of each of the plan elements. (click on image to expand)
Business Income Taxes
The Business Income Tax combines the proposals to enact a National Sales Tax/Value Added Tax with the most popular provisions of the personal income tax. All business income would be taxed, both individual and corporate, over $10,000.
The tax liability will be based on gross sales, less material costs (similar to a VAT), with a tax credit for family size and tax deductions for health insurance purchases, employee mortgage interest (either paid to employees or financed through the employer's financial institution) and education/training costs for low and moderate income employees.
The tax rate should cover all Defense, Medicare, Social Welfare and General Government Expenses, less revenue earned from excise and gasoline taxes. Collection and enforcement of this tax will be accomplished by the states. Collection and audit functions of the Internal Revenue Service will be abolished.
An employee family size credit would be paid directly to employees with dependents at an equal amount per dependent‑ regardless of income. The credit must be high enough to cover all expenses and be indexed to inflation. It will be paid directly to the employee, regardless of income. This would, in effect, be a pro‑life credit, as it would eliminate any economic incentive for abortion for workers, wives and daughters.
Note that all industries would be required to pay taxes, as this tax is more a replacement for individual income taxes than a national sales tax. There should be no exemption for food, as farmers, food processors and grocers all pay income taxes.
Non-Pension Payroll Taxes
Employer and Employee contributions for Unemployment Taxes, Disability Insurance Taxes, Health Insurance Taxes and Survivors Insurance for individuals under 62 would be shifted to the Business Income Tax. OASI(62+) would be privatized in phases ‑ with an employee contribution based on income and an equal payment from the employer to each worker ‑ which would duplicate the leveling effect of the current Pension system (see below).
The Health Insurance portion of FICA will be merged with Business Income Taxes. Business Income Taxes will include provisions for Health Insurance cost deductibility and family income equity, so that all workers and employers will be able to afford health insurance.
Corporate Income (Profit) Taxes
This tax would be abolished as a separate tax, as this income would be taxed under the business income tax. The many industry specific tax breaks must be ended. The importance of this cannot be emphasized enough, as compliance will be assured if everyone must pay.
Pension InvestmentsMost proposals privatizing Social Security ignore the central strength (and conservative criticism) of the program, it=s leveling effect. This effect is caused by the pooling of payments by all beneficiaries, who receive a guaranteed minimum payment, provided they work the minimum number of quarters. The current system subsidizes poor workers at the expense of the more well off, hence the criticism of the program and the desire to tie benefits solely to income by the privitizers. Yet, without the leveling effect, no privatization will survive the legislative process and will fail in implementation. If passed without leveling, privatization will throw millions of our generation into certain poverty upon retirement and widen the gap between rich and poor.
We propose that Old Age Insurance and Survivors Insurance for those over 62 be privatized. The employee share will continue to be based on individual income. However, the employer contribution will be equal for all employees, maintaining the current system of redistribution.
The employee share would be invested in an individual investment account or a company sponsored fund, with the employee having the option of investing these funds in employer voting stock. To hold administrative costs down and preserve funds for retirees, the employer would be required to pay administrative costs up front, rather than have them come out of plan investment gains. This adds an immediate cost cutting incentive. Currently, employees contribute 5.35% of their income to OASI. Excluding survivors of non-retirees will reduce this base figure somewhat. However, transition to a non-government program will lessen the resistance to an increased contribution. We recommend that by 2040, the contribution level should be increased to 10% (an increase of roughly 1% of income every ten years).
The employer contribution would be equal for each employee, at the national average FICA OASI contribution. This is currently 5.35% of the average national wage (which in 1997 was $1,442). This figure should also be increased to 10% of national average eligible earnings, in increments of 1% every decade. Corporations would invest these funds in their own voting stock, with dividend reinvestment and the employees or their representatives having control over how these shares are voted. This proposal will provide increased funds for each firm, which will reduce resistance to the increasing size of the contribution. The contribution for employees of privately held companies would go to the individually managed accounts funded by the employee share. For small, low wage, firm, a tax credit on the Business Income Tax will be provided if the average company wage is below that national average. See the following table for the phase-in schedule. (click on image to expand)
During the transition, funds would be slowly shifted from FICA to individual management. At the end of the transition period, any remaining federal beneficiaries would be capitalized with government bonds for the amount they would have received had they participated in the plan from the start, less withdrawals to date. Individuals over 55 at the enactment of the plan will continue to be covered entirely under the federal system. Individuals under 30 at the enactment of the plan will wholly covered by the new system. Individuals between these ages will receive mixed coverage. Federal employees would chose from a menu similar to the current thrift savings plan, with the same phase-in period percentages and the same level of equality in employer contributions.
This phase-in assumes that 1% of both employer and employee contributions will be transferred from the current Social Security surplus. If the current surplus does not allow this, the schedule can be altered, with a slower start and a more rapid conversion. Additionally, this plan requires fiscal discipline. Business income tax revenues and federal spending (less interest on the debt) must always match, or be in surplus to cover all retiree pension costs beyond FICA revenues.
Note that higher income individuals will receive more of their retirement income from their own contributions, while lower income individuals will receive more income from employer contributions. The employer contribution provides a floor for retirement income.
Progressive Income Taxation
Personal Income Taxes over $130,000 would remain at a lower rate (at least the current rate less the Business Income Tax rate) and would be dedicated to the payment of Net Interest on the Debt and its retirement. Rates could be set higher to facilitate earlier debt retirement. After debt retirement has begun, additional debt may only be incurred in time of war, and then only for defense, and to capitalize the remaining Social Security beneficiaries in 2040.
Progressive income taxation must be preserved. The main reason for retaining such a tax is practical. Without such a provision, no tax reform will pass. Any tax reform will be dead on arrival unless the wealthy continue to pay their fair share. This proposal, unlike others tax reform proposals, does that.
There are also several economic reasons to maintain progressivity. The first is the need to encourage consumption. Without progressive taxation, the savings sector increases at the expense of the consumption sector ‑ leading to a need for risky investments of the sort taken in real estate and junk bonds which led to the Savings and Loan Crisis and the current Asian financial crisis. Currently, both the consumption and savings sectors are strong, leading to healthy corporate profits and a strong stock market. This came about partly through an increase in the tax rate on the wealth sector from 31% to 36% and 39.6%.
This proposition can be tested empirically by comparing growth (in percentage terms) with the financial margin (which equals the net of net interest and the deficit or surplus expressed as a percentage of GDP). The financial margin is multiplied by -1 during Republican administrations to account for tax policy (Republican presidents cut taxes on the wealthy - requiring deficits to grow the economy, while Democrats raise taxes on the wealthy - so that approaching balance leads to higher growth).
The slope multiplier for the financial margin can be independently verified by examining data for each administration without multiplying the financial margin by -1.
A final reason for progressive taxation comes from business investment strategy: to wit, before a penny is spent on plant and equipment there must be an available customer base with the ability to consume. No corporate investment manager will hold his job for any length of time if he recommends investment because capital costs are low in the absence of such a customer base. This is why, when consumption is high, companies invest and growth continues.
Health Insurance
We propose dividing Medicaid into two funds:
1. Support for poor individuals and families (including those with HIV/AIDS), which will be transferred to a business income tax deduction or a TANF credit. Medicaid for the non‑elderly poor can be replaced by a Catastrophic/MSA/MLC plan, as described below.
2. Medicare Part C for the elderly poor. Medicare parts A, B and C should be managed as one program
Medicare trust funds can be shorn up with increased use of Medical Savings Accounts, Medical Lines of Credit and Long Term Care Credit Lines (along the lines of a negative mortgage). Medical Savings Accounts (MSA) are becoming increasingly popular. These can be augmented by Medical Lines of Credit (MLC), which would cover expenses not covered by MSAs (such as chiropractic and massage therapy), any gaps between MSAs and Catastrophic Insurance coverage and for insurance for new employees.
Business Income Taxes must be set high enough so that some part of the burden for the increased cost senior health is shifted to taxpayers, ending the subsidy to those whose parents have already passed.
