What they don't want you to know about Social Security

In tonite's program on BlogTalkRadio.com, I will detail recommendations for creating Personal Accounts in Social Security that Barack Obama, the AFL-CIO and David Koch do not want you to see. Call into the program at 646-200-3496. (Note - lines are now closed)

In January 2003, I wrote a series of articles in ISS Proxy's monthly newsletter, Labor and Corporate Governance entitled "Social Security and Ownership." You can read it on my blog (at http://iowafiscalequity.blogspot.com/2003/01/social-security-and-ownership-geocities.html.) It was designed as a set of conditions the left might impose for enactment of personal accounts for Social Security. This was in response to recent release of the recommendations of President Bush's Commission to Save Social Security.

Part two of the series, which was never published by ISS Proxy, suggested why it was in the interest of organized labor to compromise on this issue and proposed that some sort of meeting be hosted by ISS Proxy, which provides fund advisory services to various labor organizations. As the result of the first article and the conclusion of the second article, the AFL-CIO killed not only the article, but as far as I know, the magazine as well. Part II was turned into two blog entries, which you can read (at http://iowafiscalequity.blogspot.com/2009/10/corporate-governance-in-employee-and.html and http://iowafiscalequity.blogspot.com/2009/10/pay-equity-for-esops-and-union-owned.html)

What followed was a campaign to kill the issue with the hopes of winning back Congress. While the issue was successfully demagogued into the ground, it took another three years for the Democrats to retake the Hill and this had more to do with how Donald Rumsfeld bumbled the occupation of Iraq than it ever had to do with Social Security.

Currently, the National Commission on Fiscal Responsibility and Reform, better known (even to itself) as the Fiscal Commission is considering a number of issues, including how to shore up Social Security for the long term.

In 2037, the trust fund created to fund the retirement of the baby boom generation will run dry and benefit levels will either have to go down or taxes go up to avoid this. Adjustments will extend the life of the trust fund, although in the interim that would mean that the payroll tax will subsidize general government, since federal trust funds can only be invested in government bonds.

In the short term, payroll taxes will collect less than benefits and interest on the fund, forcing the Social Security system to begin redeeming bonds, which will upset the deficit picture for the rest of the government , which is a problem for taxpayers and creditors, but not the Social Security system. With the debt at record levels, this burden will likely mean that wealthier taxpayers must face the choice of higher taxes now or higher taxes on their children. This is only just, since the trust fund was accumulated in the first place when Social Security faced imbalence in the 1980s because President Reagan would not repeal his tax cuts on the wealthy and the Republican Senate backed his play.

The people who are paid to raise alarms about any changes to Social Security have used the existence of this issue as a reason to fundraise, even though President Obama made clear he is not out overhaul the entire system, but only make minor changes that will extend the life of the system for 75 years.

Even though Commission member Paul Ryan favors private accounts for Social Security as part of his plan, he has nowhere enough votes on the commission to carry the day.

When Commission co-Chair Alan Simpson snarked back at a Huffington Post blog entry by the (not old) executive director of the Older Women's League, groups of Social Security defenders were ready to pounce or pile on, even though one could interpret the former senator's comment to mean that she should send her comments directly to the Fiscal Commission rather than posting them on Huffpost.

Since then, this issue has become the focus of both fundraising for progressive advocates and a rallying point for Democratic congressional campaign committees who are desparately to keep control of Congress. I assume that the White House political organization is involved in this push (especially since they didn't fire Simpson, allowing him to remain an issue while looking presidential), so I am sure they don't want compromise.

Unlike my counterpart at the O.W.L., I did submit a proposal to the Fiscal Commission. Since I address personal accounts, it probably will not be considered. It is similar to my 2003 article, and you can read it on my blog (at http://iowafiscalequity.blogspot.com/2010/07/revised-submission-to-fiscal-commission.html). Here is what I wrote in the comments section on Social Security Personal Accounts (which is what I will say if they let me testify). Under my plan...

Old Age and Survivors insurance would still be provided and funded separately as a national program. OASI65+ rates with disability and survivors of workers excluded are approximately 5% of income for wages for employers and employees, or 10% total. Introduction of the business income tax and the related decrease in gross wages requires a higher rate – especially if child tax credit income is also exempted from the tax.

Short term funding concerns occur around repayment of the Social Security Trust fund. This repayment must occur outside the OASI tax, as the bargain with the Baby Boom generation was higher taxes during their working lives in exchange for funding the government to make up for the shortfall caused by the Gramm-Latta tax cuts, which caused the deficit to balloon in the early 1980s. The taxes which were cut then must be raised now to repay the fund. Over the long term, assuming demographic changes caused by the expansion the Child Tax Credit are inadequate, raising the income limit or eliminating it altogether is proposed.

Eliminating the income cap is a necessary condition for enacting Personal Retirement Accounts, which is the only means that will effectively wall off retirement savings from spending through the general fund.

The other condition for enacting such accounts is to move redistributive elements from the benefit side to the accumulation side by crediting and distributing the employer contribution for full time workers equally – without regard to individual income – and distributing a contribution to part time workers based on a set percentage of the full-time contribution. Over time, the percentage of revenue assigned to personal accounts will increase until there is no longer a need to consider raising the retirement age. Individuals will retire when they have enough shares to provide the retirement income they desire through dividend disbursements and sales.

The other options are separately funded retirement accounts and broadening tax collections from payroll to all value added, including imports. Both of these options allow an aging workforce to tap overseas labor and enhanced automation to fund public pensions. The only flaw in such a plan is that developing economies mature and their labor forces become consumers and demand higher wages. This happened in Mexico after NAFTA and is happening in China now. Foreign labor is, therefore, an unreliable source for retirement savings over the long haul.

The declines in the stock market show how reliable the standard vision of a personal retirement account is. Had the President’s Commission to Strengthen Social Security succeeded in its efforts, or the Clinton proposal for USA Accounts been adopted, people who have recently retired or who are about to retire would be rioting in the streets, making the Health Care Town Hall protests of last year look tame by comparison.

The only possible way to enact personal retirement accounts is by funding them with fully insured employer voting stock, with the insurance consisting of joint ownership of stock in similarly situated companies. Insurance funds, which would be private, would both guarantee retirement savings for its members and provide a safety valve against the type of bad management that became famous in the 1990s. An insurance fund which held a third of the shares of each company could vote those shares when prompted by 25%+ 1 share of employee-owner or retiree shares. Just the existence of such a provision would make management think twice about taking undue risk or playing it too safe. These insurance providers would retain the best and brightest in management expertise – something akin to the skill found at Berkshire-Hathaway rather than Merrill-Lynch. Leadership would replace gamesmanship as a desired skill, which will help to prevent the next debacle.

Employee-invested accounts, as well as all accounts for non-share employers – as well as the survivors of employees – would hold non-voting shares of the insurance fund only. Survivors and spouses would purchase an annuity upon retirement or inheritance (which would be tax free if the deceased’s shares were sold back to the firm or ESOP) while retirees would continue voting their shares until converted to an annuity at their option.

Employees and retirees could designate their union or professional association to vote their shares in blocs and corporate and ESOP boards would be representative of blocs rather than unitary. To give unions and their members a further stake in employee-ownership, Taft-Hartley and ERISA prohibitions on concentrated ownership would be changed from 10% to 66.7% of fund value. This is likely the only way to end resistance to this proposal by the labor movement. There is no circumstance where these accounts will feather the nests of Wall Street.

As you can guess, this is not what the Tea Party, or their principal backer, David Koch, wants to have enacted. Indeed, if this became the Democratic position, the Tea Party would likely send screamers to congressional town hall meetings to try to stop any changes to Social Security.

Aside from defusing the political issue, why else would the AFL-CIO and David Koch not want these changes? Because they would upset the entire apple cart eventually. Indeed, I made a similar proposal to the White House, the UAW and management to run Chrysler and GM like employee owned companies and did not get as much as a thank you note.

What was so controversial? I will lay it out and you can tell me what David Koch, the unions and the White House are afraid of.

First of all, the social context of ownership would change. Hierarchy under a principal agent model would have to be replaced by more democratic governance. Profits would have to be distributed differently as well, with workers and inventors getting their fair shares.

Organized labor would also need a different mindset, with conflict being replaced with cooperation. Indeed, a flat corporate organization would empty the executive suites at the AFL-CIO and the UAW. Board representation would have to change, as described above, which would require union members of the board to focus on profitability rather than feathering the nest for their members.

Pay equity was probably even more difficult to swallow, especially for management. Indeed, if the employees really operate as owners, they will insist that managers bid on their jobs with the lowest bidder winning and equal bids determined by worker ballot.

Innovation would be paid based on accomplishment rather than position. Imagine what would happen in both the public and private sectors if this caught on?

Education, which is also a cause of pay diversity, would be paid for by the employee-owned company rather than by the individual, further flattening wages.

Longevity would be paid by stock accumulation rather than by wage increments and families would be paid for additional children, so that firing people in their forties and fifties under the guise of new technology would no longer make sense.

These provisions would complicate union contracts and standard operating procedures terribly, and the old bulls in the U. don't like change, even if it would make their members richer and more secure - which is why I believe this is why my plan is the one the establishment on both sides does not want you to know about.

Tell me what you think. Comments are welcome both below or on my show page.