Hon. Charles E. Grassley
135 Hart Senate Office Building
Washington, DC 20510
Dear Senator Grassley:
May God grant you, your family and your staff a blessed Christmas and the happiest of new years.
I write today on the most vital of topics, the future of Social Security. As you know, the President's Commission to Strengthen Social Security has concluded its work, recommending three models for reform. These models provide an excellent starting point for what promises to be a spirited year of debate, although some modifications are necessary before passage is either possible or advisable.
The Commission has taken great pains to assure that the poorest individuals are made better off under their proposals than under the current program. However, more attention to distributional equity is essential before these proposals have even a snowball's chance of survival on a sunny August day at Hawkeye Downs.
A good starting point for assuring the equity of whatever solution is accepted is to be honest about how the program credits money to retirees. There is a huge disconnect between how contributions are credited and how benefits are calculated. Currently, employer contributions are credited as a match to the employee contribution, while benefits are more in line with average income. This leads higher income individuals to believe that they are being robbed by the system. This perception is a driving force behind the push for Social Security reform.
There is a better way to calculate the employer match to bring contributions more in line with benefit projections. Instead of basing the employer contribution on the employee contribution, credit each full-time worker at the firm at the average contribution for such workers in the nation as a whole. Part-time workers would be credited at a separate rate. We believe the result will bring contributions more in line with expected benefits.
These revised assumptions lead directly to the Center's critique of the Commission's Reform Models. We recommend that employer and employee contributions be treated differently in both calculation and personal account creation. The following table summarizes our recommendations:
Average income can be calculated in different ways for the purposes of the employer contribution. Different averages can be credited for full-time and part-time workers. The average can be for the firm or for the economy at-large. If a firm average is used, contract and temporary workers should be included in the average for the client firm. If the national average is used, the amount paid into FICA by the firm should be taken into account so that the total cost to the firm of the employer contribution is the same percentage of payroll as the current obligation.
Another major area of concern is plan administration. Employees at for-profit corporations and their employers must have the option of investing the employer contribution in Employee Stock Ownership Plans. In this case, employees or their representatives must have a voice in how their shares are voted, including giving full voice to each employee faction (labor, professionals and management), so as to mitigate against the repetition of the Enron debacle. Additionally, employees should have the option of investing their private account contributions in the ESOP rather than the federally sponsored mutual funds.
Investing private account funds in ESOPs provides for a more direct avenue of investment in plant and equipment, rather than encouraging stock speculation and subsidizing mutual fund managers. It gives the employees of the firm and ownership incentive and long term protection against layoffs, provided that employees also have the appropriate voice in the leadership of the firm. The existence of both private accounts and the ESOP option also makes a discussion of raising or abolishing the income cap on contributions more acceptable, as such an increase will raise the average income which can be invested in the ESOP trust fund.
Addressing these concerns will make the creation of private accounts better for Iowans, since the average Iowa income reflects the lower cost of living found in the state. The changes to the President's Commission's plan which the ICFE has identified will allow younger Iowans to stay in the state, where many now leave for higher income jobs in other places. Without the changes we have proposed the flight of Iowa's youth will only get worse.
Before closing, please allow me to address an issue that was ignored by the Commission, the funding of Disability and Health Insurance. To remove these programs from the pressure of private accounts, these programs should be wholly funded by the employer contribution, with a corresponding decrease in gross, but not net, employee wages and salaries. The portion of Survivor's Insurance which is attributable to workers who die before retirement should be treated in the same way. These actions will forever remove these vital programs from this debate, which will allow the debate on expanding private accounts to occur in the future.
We thank you for your attention to these matters and thank you for your work on behalf of Iowa. Please contact me if you have any questions or if I can be of any assistance. I am available to testify on these matters if you so desire.
Sincerely,
Michael G. Bindner
Executive Director
135 Hart Senate Office Building
Washington, DC 20510
Dear Senator Grassley:
May God grant you, your family and your staff a blessed Christmas and the happiest of new years.
I write today on the most vital of topics, the future of Social Security. As you know, the President's Commission to Strengthen Social Security has concluded its work, recommending three models for reform. These models provide an excellent starting point for what promises to be a spirited year of debate, although some modifications are necessary before passage is either possible or advisable.
The Commission has taken great pains to assure that the poorest individuals are made better off under their proposals than under the current program. However, more attention to distributional equity is essential before these proposals have even a snowball's chance of survival on a sunny August day at Hawkeye Downs.
A good starting point for assuring the equity of whatever solution is accepted is to be honest about how the program credits money to retirees. There is a huge disconnect between how contributions are credited and how benefits are calculated. Currently, employer contributions are credited as a match to the employee contribution, while benefits are more in line with average income. This leads higher income individuals to believe that they are being robbed by the system. This perception is a driving force behind the push for Social Security reform.
There is a better way to calculate the employer match to bring contributions more in line with benefit projections. Instead of basing the employer contribution on the employee contribution, credit each full-time worker at the firm at the average contribution for such workers in the nation as a whole. Part-time workers would be credited at a separate rate. We believe the result will bring contributions more in line with expected benefits.
These revised assumptions lead directly to the Center's critique of the Commission's Reform Models. We recommend that employer and employee contributions be treated differently in both calculation and personal account creation. The following table summarizes our recommendations:
Average income can be calculated in different ways for the purposes of the employer contribution. Different averages can be credited for full-time and part-time workers. The average can be for the firm or for the economy at-large. If a firm average is used, contract and temporary workers should be included in the average for the client firm. If the national average is used, the amount paid into FICA by the firm should be taken into account so that the total cost to the firm of the employer contribution is the same percentage of payroll as the current obligation.
Another major area of concern is plan administration. Employees at for-profit corporations and their employers must have the option of investing the employer contribution in Employee Stock Ownership Plans. In this case, employees or their representatives must have a voice in how their shares are voted, including giving full voice to each employee faction (labor, professionals and management), so as to mitigate against the repetition of the Enron debacle. Additionally, employees should have the option of investing their private account contributions in the ESOP rather than the federally sponsored mutual funds.
Investing private account funds in ESOPs provides for a more direct avenue of investment in plant and equipment, rather than encouraging stock speculation and subsidizing mutual fund managers. It gives the employees of the firm and ownership incentive and long term protection against layoffs, provided that employees also have the appropriate voice in the leadership of the firm. The existence of both private accounts and the ESOP option also makes a discussion of raising or abolishing the income cap on contributions more acceptable, as such an increase will raise the average income which can be invested in the ESOP trust fund.
Addressing these concerns will make the creation of private accounts better for Iowans, since the average Iowa income reflects the lower cost of living found in the state. The changes to the President's Commission's plan which the ICFE has identified will allow younger Iowans to stay in the state, where many now leave for higher income jobs in other places. Without the changes we have proposed the flight of Iowa's youth will only get worse.
Before closing, please allow me to address an issue that was ignored by the Commission, the funding of Disability and Health Insurance. To remove these programs from the pressure of private accounts, these programs should be wholly funded by the employer contribution, with a corresponding decrease in gross, but not net, employee wages and salaries. The portion of Survivor's Insurance which is attributable to workers who die before retirement should be treated in the same way. These actions will forever remove these vital programs from this debate, which will allow the debate on expanding private accounts to occur in the future.
We thank you for your attention to these matters and thank you for your work on behalf of Iowa. Please contact me if you have any questions or if I can be of any assistance. I am available to testify on these matters if you so desire.
Sincerely,
Michael G. Bindner
Executive Director
posted by Michael Bindner at 6:00 PM
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