Social Security Reform Prospects After November

This is a discussion topic I posted on the Capital Ownership Group Social Insurance e-mail list. I am also sharing it here.

The elections are coming up. The next Congress will be President Bush's last try to enact Social Security Reform.

If you would, please assess the prospects of this under the the possible congressional scenarios (both houses Republican, both houses Democrat, Dem House/Rep. Senate and Rep. House/Dem Senate).

I think the election of Democrats actually makes consideration of Social Security reform more likely, especially if the Democrats control the House and can include revenue enhancements at the upper levels of income. This compromise is not possible with the GOP in control of the House (at least under this Speaker). I believe Bush will compromise with the Democrats to get this passed, since this is his big legacy item.

Also, those familiar with the list know that I have a proposal, Norm Kurland of CESJ has a proposal and the President has one.

If you are unsure about any of these, please ask.

Briefly, the President is proposing transferring a portion of FICA withholding to investment in Personal Retire Accounts managed (and presumably voted) by private fund managers. The President is also proposing tax reform to replace many deductions with credits that target lower income taxpayers and much in the way of simplification. A savers credit is included in the package.

CESJ proposes (last I checked) abolishing FICA withholding and funding retirement obligations from the general fund, which will be funded by a flat tax on business and personal income, with exclusion of all income below the poverty line plus direct subsidies for a base level of living expenses. The key feature is the provision of capital credit to each citizen at birth which may be invested in a number of ways, including ESOPs, Community Investment Corporations (economic development), CSOPs (Customer Stock Ownership Plans) (utilities and mass transit) and ISOPs (individual stock ownership plans of a more diversified portfolio). The credit would be repaid from dividend payouts, which will be 100%. New corporate investment would financed by these means rather than through retained earnings or other borrowing schemes, largely because these projects would be backed by borrowing at the discount window for no interest and a .5% service fee. Gifts and inheritances received would be tax free for the first million dollars and taxed after that to limit asset concentration. This structure allows citizens a more direct input in the decisions of utilities and community development authorities and allows workers to gain a voice in the decisionmaking of their firms, at least to the extent of new investment. Parents would vote the ESOP shares of their children. Presumably they would also vote their ISOP shares as well. A management philosophy called Justice Based Management guides firm management.

The Iowa Center for Fiscal Equity plan is to end income taxes on all but the highest earners, who would pay an income and inheritance/gift (received) surtax equal to their current permanent tax rate minus 25%, with their employers paying what was their tax liability through an expanded business income tax (where wages and salaries are no longer deductable). The proceeds of this tax would also fund contributions for Medicare, Disability Insurance and Survivors Insurance for non-retirees. Net, but not gross, income would be reduced by this amount. Employers would receive tax credits to be passed along to their employees for child and dependent spouses of $500 per individual per month and their would be a minimum wage subject to tax of $10 per hour. Health care, mortgage interest, education and charitable contribution credits would also be either transfered to employees or kept by employers if they fund health care, mortgage interest costs and contributions for education and other services provided by charitable organizations in lieu of taxes. Workers would pay 3% of their income to the Old Age and Survivors Insurance fund and 2% of their income into a 401(k) type account (which may be managed by their union or professional association). Employers would pay OASI 3% of employee income and would issue an additional 2% of income to employees in company stock or ESOP shares and shares in utilities and communication firms used by the company and its employees. The issuance of this stock would be direct with no repayment required. It would fund both new investment and the buyback of shares held by non-employee investors. Employees would vote all shares, either directly or through their union or professional association rep. ESOP rules would be changed to require that ESOPs distribute shares on a per capita rather than a percent of income basis. Dividends would be reinvested. Extra income would come from incentive compensation which would be paid by both cash awards and stock grants. Some dividend payout could be channeled to extra income if a longer work life is desired. Retirement is designed to coincide with debt retirement of a house with food production facilities, therefor a smaller cash and retirement income is required and the workday is shorter to account for food production time.

An option for this program change is to allow firms to opt out of paying any FICA Old Age and Senior Survivors taxes provided they fully fund all retirees, former employees and current employees with stock grants as if they were participating all along at 5% of average income - as stated in the Average Wage Index calculated by the Social Security Administration. Any firm that does that will be matched by a stock fund representing 5% of individaul wages procured with monies from the general fund for those same individuals for the time they worked at any employers who do this. Some employers are not for profits or non-corporate. These employers would continue in Social Security, which would essentially become a pension fund for small employers - although some of these may be able to opt out if they fully fund a robust pension fund.

In your assessment of each of these plans, mention the likelihood of each of these proposals passing or even being debated and who would have to be signed up to do so. How would organized labor figure in. Will it continue to obstruct debate? Is there a way to make the concept attractive to organized labor? Has Labor gotten too much in bed with the Democrats to do anything but obstruct while George Bush is president? If so, is this in the interest of their members?

Here is my take on the issue.

Organized labor would need to give its go ahead for any debate to take place, or at least not decide that this is an election issue. If the Democrats win big in November they may allow something through, especially if they are allowed to manage and vote the funds of their members. The key is getting them to listen - or getting their members to force the leadership to do so.

I think organized labor has more to gain from the ICFE proposal than any of the the other two.

Look at each proposal (Bush, Kurland, Bindner) and assess in terms of wealth expansion and workplace democraticization, as well as globalization.

The Bush proposal would expand the power of management and would have a small effect on wealth generation for the middle class. It likely would not do much for the poor. It would certainly be beneficial to wealthier taxpayers. It would inhibit workplace democratization by shifting more power to money managers who traditionally support management. It depends on globalization to solve the aging crisis, meaning less old societies will generate the profits and produce the goods used by American consumers and owners. In effect, they are paying taxes into social security without getting benefits. When they figure this out, look for a Marxian reaction if this option passes in its pure form.

Clinton's USA saver account proposal and its democratic varients rely on the building of savings in addition to Social Security, rather than as a part of that. In the long term, this leads to the same result - that workers in less developed countries will subsidize their retirement as if they were paying taxes into Social Security without getting the retirement benefits. Foreign workers won't stand for this for long.

CESJ calls for a new Breton Woods to address this problem, but its solutions are country specific, as they rely on each country's central banking system to create capital.

ICFE calls for a more integrated supply chain, with the foreign subsidiaries part of the same firm and getting wages and benefits at the same standard of living as American workers (and receiving the same level of training and equipment so that they and their machines are as productive). These conglomerates will use an internal transfer pricing schema that accounts for this and will work to have currency rates reflect such a scheme.

Both CESJ and ICFE have ESOPs or other forms of employee ownership as a key feature, as well as a more enlightened management style. I have put the ICFE management plan on our web page, while CESJ provides a bit less detail regarding their Justice Based Management. For example, ICFE deliniates all of the factors it will use in equalizing wages, which I don't believe is a goal of CESJ. Of course, wages won't be absolutely equal and the average worker in a CESJ/JBM system and a ICFE system will likely not notice much difference, with the exception of elections for managers (an ICFE feature). Additionally, in the ICFE system, each worker gets the same base share payout each month, regardless of salary - with cash and share bonuses for measurable accomplishments. Under the CESJ system, the worker gets his shares through his or her Captial Homestead Account and then receives a profit distribution for both extra income and repayment of the CHA principal. Additionally, each worker gets shares only for him or herself, rather than control over the shares of their children so that each worker similarly situated (in longevity and accomplishment) votes the same number of shares. Under CESJ a worker with five kids with similar tenure would have more voting power than one with none. Norm and I have agreed to disagree about the justice of this.

The impact on product cost between the CESJ and ICFE plans is likely nil in the aggregate, although the breakdowns are different with the ICFE plan paying more in direct distribution of shares while CESJ pays more in dividends.

ICFE also throws more into the benefit mix, like home finance and consumer credit through the employer. It also has the employers buy any shares in local development corporations (or local government bonds) as well as public utilities. These would then be transfered to the employee on retirement or resignation - unless the employer continued to pay electric and telecom bills for retirees. The key is to purchase these services and own these stocks in bulk.

The major difference between the CESJ and ICFE proposals is that the ICFE proposals aim to eliminate the need for most individuals to deal with most matters financial. The firm would pay the taxes and provide health care, finance and insurance (or self insure). Once the debt is paid off, the company or its bank would go to the Fed Discount window for borrowing for expansion or for monies to underwrite housing finance for its employee owners, rather than forcing the employee to deal with bankers and individual CHA accounts. Additionally, because the ICFE scheme is not confined to new shares, but will also be used to purchase shares from existing owners, most firms will be privately held in a few decades. In order to protect the retirement accounts of the employees, they will contribute shares to an insurance fund made up of groups of employee-owned firms so that if any one firm fails the employees and retirees would be protected with shares in the insurance fund. You could call this an ISOP, if you wish, and the shares would be non-voting. However, they would not be available on the open market. That is the other difference. The goal of the ICFE scheme is to minimize non-employee/non-retiree control.

The last difference is in "education". Under each plan, people would be educated to realize their full potential. Under ICFE, that potential would be linked with their work and most leisure work would be paid.

On leisure work, my bottom line is that if someone is telling me to do something like employment and I am required to be there for and at a specified time (with community theater being the exception), you must pay me or have some kind of exchange of favors (I watch your kid sometimes, you watch mine sometimes).

Coming back to my original point, I believe that what I am offering here, if it receives any publicity, will be what will pass. It actually addresses the main problem with Social Security, demography. It also shifts power from fund managers to employees and, while it eventually replaces the Old Age fund for some in toto, it initially works within the paradigm of the current debate. The CESJ proposal is a more radical departure that I don't think will sell. The ICFE plan tweaks the Presdent's plan in a few places and gets a similar result in the long run.

Discussion anyone?

Please do not inject any other proposals. This is not the forum to trot out Social Credit, the Tobin Tax or Georgism since none of these have any direct impact on the distribution and control of stock ownership. While the proceeds of these schemes may be used to buy stocks, changing stock ownership is not their primary purpose. Of course, if there are other proposals out there you would like to discuss, such as the Clinton USA account or some variation on that, feel free.

Let's get the ball rolling.

Torture (and the U.S.) Does It Work (and is it new)?

Edwidge Danticat writes in the Sunday Washington Post Outlook about her experience in doing a film about torture in her home country of Haiti.

She leaves unsaid what we all know, that U.S. support of torturous regimes, including technical support on the art and craft of torture, is nothing new. Therefore, it should come as no surprise that the old cold warriors surrounding George W. Bush are insisting on torture as an item in the U.S. arsenal, since for them it has always been there.

There is a lesson in Ms. Danticat's article. She marks on the victims of torture that

...eventually I recognize their hardened core and, more often than not,
their reinforced defiance and renewed commitment to that for which they were abused. When I meet former torturers, they don't proudly stand up
and say, "Here I am, a torturer." Unless they're infamous, they have sought to
compartmentalize their lives.

This is the key question in determining whether it works. Obviously, if it leaves one side more motivated than the other, it does not work. Aside from the fact that it is evil, because it eventually leads to an activiated revolutionary class, it is also STUPID.

We can see this from our experience in Iran. Our support for the Shah and his Secret Police have left us in the situation we are in now, possibly on the brink of war. If we had not supported the Shah and his unsavory practices, we would not face a hostile Islamic Republic.

And yet we have an adminstration and its supporters in Congress who still do not learn from the past. Let us hope that the voters are learning and the Congress is replaced by a majority which will hold real investigations on our support and practice of torture, using its impeachment power when necessary.

The torture issue also calls into question the whole focus of American foreign policy. A policy that is driven by American self-interest, where deals with despotic regimes are tolerated, clearly does not serve either the cause of liberty at home or abroad. It serves the interests of our business community and our military, but this is not the same thing as serving the better interests of our nation. This is why replacing one set of scoundrels with another is only a start. In the long term, a basic paradigm shift is required, one which we offer.

Abolishing the Penny

Sebastian Mallaby weighs in on Senator Kolbe's proposal to abolish the penny by adding that we ought to abolish the nickel and dime as well.

I would go one better than Sebastian - keep the dime and abolish the quarter and the paper dollar then put George Washington on the Dollar Coin. What is my rationale for dumping the quarter? If you are dumping the penny, dump the entire decimal place and round to the nearest tenth of a dollar (so the dime must be kept). We may wish to make a smaller fifty cent piece and make the dollar larger, so that the new dollar has some heft to it.

Of course, our biggest challenge is not the format of the currency but its deterioration. We should strive for Euro-Dollar parity. Discussion on how to do that may be a more worthwhile endeavor.

Much Ado About Earmarks

Ruth Marcus writes in today's Washington Post about the practice of congressionally earmarked spending, comparing it to the new movie, All the King's Men which is loosely based on the life of Huey Long. She gives the earmark process an almost Shakespearian flavor.

In reality, legislators do not introduce earmarks for their own benefit, but because someone asks them to, usually a constituent and/or donor. There are two types of earmarks: budgetary and regulatory.

Budgetary earmarks designate in law or congressional reports how existing budgetary allocations are to be spent. In essence, they take discretion away from administration officials, replacing their judgment with their own. They don't do this on their own, but rather in response to either state and local government or private interests in their state - such as universities, businesses or non-profit institutions. Sometimes they codify agreements that have already been made, such as when I negotiated the terms of an earmark for the Washington Marina with a staff member of the House D.C. Appropriations Subcommittee when I was working for the Mayor. The "Bridge to Nowhere" in Alaska was likely such an earmark worked out between the state, the airports authority and the airlines who benefit from the bridge. By the way, that project did not go away - it is being funded through the formula grant that Alaska gets as part of the Highway Bill.

This leads to an interesting question: how much would borrowing and taxes be reduced if earmarks were eliminated?

Not one red cent. Earmarks spend within the existing allocation in the budget resolution or the existing authorized spending in the highway program. As I stated above, they merely move the decision authority from the agencies to the Congress, where constitutional purists believe it should be anyway. To them, the scandal is not that Congress is earmarking funds, but that the Administration is making any spending decisions at all.

This brings us to the topic of regulatory earmarks. These are often requested by the same constituencies that requested budgetary earmarks. For example, during the Clinton Administration the Interior Appropriation was fillibustered to revoke higher grazing fees and new grazing rules for BLM. This was not done because the westerners in the Senate were staging their own sage brush rebellion but because local ranchers asked them to.

The power to make rules at all is delegated by Congress to the Administration. These delegations are not irrevocable. Indeed, with the elimination of the single house or committee legislative veto, earmarks are the best way to oversee the Administration's regulatory program, barring a total revocation of Administration rulemaking authority. We suggest as much as part of the authorization process on our web page.

The problem occurs when regulatory (or spending) earmarks are made in exchange for campaign contributions. This is akin to bribery. The solution to this, however, is not to change how earmarks are done, but how we fund campaigns.

George Will's Blues

In Sunday's Washington Post, George Will reviews Thomas Edsall's latest book on Building Red America. As you might expect, George doesn't like it, although he doesn't argue the facts. Quite to the contrary, he defends the Republican focus on social issues over economic issues.

Edsall notes that one-third of American children -- and almost 70 percent of African American children -- are born to unmarried mothers. Then, in an astonishing passage about this phenomenon, which is the cause of most social pathologies, from crime to schools that cannot teach, he explains how Americans differ concerning what he calls "freedom from the need to maintain the marital or procreative bond." "To social conservatives," he writes, "these developments have signaled an irretrievable and tragic loss. Their reaction has fueled, on the right, a powerful traditionalist govement and a groundswell of support for the Republican Party. To modernists, these developments constitute, at worst, the unfortunate costs of progress, and, at
best -- and this is very much the view on the political left as well as of Democratic Party loyalists -- they constitute a triumph over unconscionable obstacles to the liberation and self-realization of much of the human race." Looking for the real reason for the rise of "Red America"? Read that paragraph again.

An yet Will begins the entire essay noting that the GOP is shaking in fear over the next election. The next election is not what is feared. Both parties fear a third party or a coalition that combines social activism and traditional values. That would be this one.

Bush's Evil Justification for War

Michael Abromowitz and Michael A. Fletecher report on President Bush’s September 11th Address to the Nation in the September 12 Washington Post.

I did not watch the speech last night, as I figured it would be more of the same. From the article, it appears I was right. The President continues to link the war in Iraq with the war on terror. It is this linkage that makes the war in Iraq not only ill advised, but immoral.

In essence, George W. Bush started a war in Iraq to attract the terrorists who would otherwise hit other American targets, both here and abroad. Essentially, he has continued a civil war that his Vice President started while he was his father’s Secretary of Defense and, by linking it to the war on terror, TURNED IRAQI CIVILIANS INTO CANNON FODDER in the name of liberation. That is not only cold, that is EVIL. Any Americans who share in that intention, or who vote for Republicans because of it, share in that evil. I am no fan of Saddam Hussein and am glad he is gone. The way that the Administration has turned a simple act of liberation into a continuing conflict for their international and domestic political aims is just plain wrong.

It would be like if aliens landed here and engaged us in a fight over morals, not for our own happiness, but to make a point between the two camps on the nature of good and evil. In the end, we would feel used, not saved. Of course, there are those conservatives who believe that is what morality is about, however they are misguided in both their morality and their support of this war.

The Rumors of our Death are Greatly Exaggerated

I read Michael Lind of the New American Foundation's comments on the death of libertarianism in The Financial Times in the link provided. He could not be more wrong. No movement ever goes away. It will likely take a different form, but some form of libertarianism will reemerge.

Take for example the private savings accounts for Social Security. That was first floated by Ron Brown FOR THE DEMOCRATS in 1992 as a reaction against the payroll tax being used to balance the budget. That hasn't gone away.

Vouchers are dead, but the Charter school movement has taken their place. I predict the most successful chartered schools will include parents on their governing boards. Giving parents more direct control and killing the central bureaucracy is the goal of vouchers. That is called victory by other means.

Last time I heard, Cato was still getting money and the LP was still running candidates. George Bush has been defeated in his efforts, that does not mean Libertarianism is dead. It may just be dead in the GOP (although I doubt that too).

Libertarianism will be a key feature in the party of the center, because that is what the voters want. It may fracture the GOP coalition, but it is an essential feature of ours. So, Libertarians, if you are tired of being mistreated by the GOP and do not like the secular focus of the LP, come right on in here.

As the title says, the rumors of our death are greatly exaggerated.

Democratic Hopes in Lincoln's States

E.J. Dionne, in the September 5th Washington Post, speculates on the irony of the Democrats doing a counter shift to balance the rise of the southern Republicans. His numbers indicate that maybe the "Lincoln Republicans".

We can only hope, although I am not sure how this will ease our national divide. The punditry seems to think that it will be set in stone. While there is evidence to support this, if history is our guide the only thing constant in American politics is change, often at the hands of new or third parties - which is why I am putting this post here and not on my Christian Left blog. The gerrymander effect may still leave Congress under Republican control, although this is seeming less likely all the time. Wait for an October surprise. If that happens, there will be a demand for something new. Even absent the expected mini-revolution, something has got to give - especially on our most contentious issues.

Attacking Inequality

In Labor Day's Washington Post, Sebastian Mallaby presents an excellent analysis which concludes that tax reform may be the best way to attack inequality.

We agree with everything he says, or almost everything. Unionization and an increase in the mimimum wage are necessary parts of the equation and must be done at the same time so that when the minumum wage goes up working conditions, such as air conditioning do not deteriorate. More about this later.

There is only one fly in the ointment - getting the changes he advises done. The political leadership of both parties like rich people. Rich people give them money. The centrist tax reform solutions which we also agree with will be resisted by anyone who sends their legislator a big check, which is why if you are serious about tax reform you must look to campaign finance reform first. We will do that. Our tax reform will also be more attractive to working people, because we have proposed and will end the responsibilty of filing by all but business owners and the wealthiest tax payers. We will also bring together the anti-abortion vote and the living wage vote by increasing the credit for children to an adequate level for a middle class existence. This will allow an end to welfare programs for all but the illiterate, who would be paid to achieve literacy. Shifting tax benefits to families and tax filing to employers leaves open a loophole that must be filled, since employers may potentially shift their entire payroll cost to this tax credit. In order to avoid this, the minimum wage subject to what would amount to a value added tax would be raised to at least $20,000.00 per year.

Going back to unionization, there is one circumstance where it will not drive jobs offshore - if unions invest their pension funds in the firms where their employer work - especially the multi-national employers or employers with significant off-shore supply chains. Gaining control of these firms will allow for unions to benefit from the Wal-Mart effect in reverse. Rather than demanding a non-union shop, union owned firms will demand that their supply chains be unionized and that a living wage be paid to overseas workers. Further, they will use transfer pricing schemes to assure this happens. If unions wish to survive and have firms that thrive, they will change the way they do business as well as how the firms they own do business and pay their employees. they will als change their longstanding fear of Social Security reform. Mallaby states that tax reform can be used to lower payroll taxes. This is one possible scenario. Another is to meld the payroll taxes for non-retired survivors, disability insurance and Medicare into the business income tax as part of tax reform (lowering net but not gross wages accordingly) and by directing at least a portion of the retirement portion (possibly the employer contribution) to acquiring shares in the employer which would be voted by the union or professional association. Diversivification is important, but this can be accomplished by a joint insurance fund whereby each such firm donates share of its employee or union owned equity each year so that, unless all such funds fail at once, no retiree or employee looses everything in a business failure. This is also a cheaper alternative than a mutual fund, as fund administration is done at the group rather than individual level.

Doing all of these things will truly attack inequality, although it can all start with tax reform.

Thoughts from 2004: Are Republicans as Crooked as We Think They Are? Part 1 - Framing the Question

As time marches on and the inauguration becomes but a memory, it is important to delve into the question: Are the Republicans really corrupt, in thrall to the major corporations who are themselves consummate evil doers, or is there perhaps another explanation? Another way to ask this is, do the Republicans believe their own propaganda, or do they know that they are lying for the benefit of profit?

These questions are important for both parties. They are important for Democrats and Greens because they affect their messages and actions. For instance, if the Republicans truly are crooked than persuasion will have no effect. Rather, investigation is the best tactic. Winning then becomes all-important, because if you are out of power your investigative power is limited. If the top ranks of the party are truly evil than the strategy is to expose this evil to the rank and file Republican so that they will cast off their leadership or flee to the righteous side. This is essentially a neo-populist position. If the Republicans aren’t crooked, then rational argument is possible, as is compromise. It also becomes easier to attract voters from the other side, as then you only need convince them that their leaders are wrong, rather than that they have been duped in a conspiracy. This issue is also important for Democrats because of the adoption of the Democratic Leadership Council types of much of the free trade rhetoric from the other side. Most importantly, a conclusion that the Republicans aren’t crooked can lead to a more genteel polity, as the current tone of debate is frankly caustic.

This question is very important for Republicans. If the higher ups in the party are crooks than to be a Republican voter is to be the hoodwinked member of a criminal conspiracy. Most importantly, this discussion holds up a mirror for the Republicans to see. Whether the question is true or not, it provides a valuable view on how the party and its leadership are perceived by the other side. For the rest of this series, go to my other blog.

Stopping the Scold War

Retired diplomat John R. Hamilton writes in The Washington Post about how American state department report cards irritate the rest of the world.

That is part of the reason. The other is that we have a President who thinks he is the leader of the free world. Not just this one. All of them. the sad fact of the matter is, as I wrote in my Iraq essay, that assumption is true if you look at our military treaties which put an American commander (and therefore the commander-in-chief) in charge of all joint operations.

The other part is the report cards, which he describes but does not explain. To explain them you have to reveal who mandates these. The State Department does not do these to get their kicks. Congress makes them. These little requirements get slipped into authorization or appropriations bills as a way to get enough votes to pass. Anyone with an ax to grind can put it in. Of course, these report cards hardly lead to action. Short of war or sanctions (which hurt us more than them), there is no action you can really take against another state. Now, if these reports led to us not supporting dictatorships, like the Saudis for instance, they might have a purpose. However, they are merely a publicity stunt.

If we are truly serious about our principles and want to spread them, we would join with like minded nations in some form of allied government (see the attached essay) which would have the authority to enforce these principles, both here and in other member regions. In fact, aside from control of an allied military and common currency (in which there would be a common economy) that would be its main function, policing the lower levels of regional, state/provincial and local government against acts of tyranny.