Comments for the Record
United States House of Representatives
Committee on Ways and Means
Social Security Subcommittee
Hearing on Understanding Social Security’s
Solvency Challenge
Wednesday,
September 21, 2016, 10:00 AM
By Michael G. Bindner
Center for Fiscal Equity
Chairman Johnson and Ranking Member Becerra,
thank you for the opportunity to submit my comments on this topic. I will leave
it to the Administration and CBO’s witnesses to explain the difference between
the future projections, except to say that both forecasts are required to be conservative. As the Economic Policy Institute found many
years ago when attempts were being made to justify personal accounts in Social
Security, there is truly no solvency problem if more realistic estimates are
used. Of course, that relates to the
system as a whole, not on how the Trust Fund is to be reimbursed, as I
reiterate below.
As usual, our comments are based on our four-part
tax reform plan, which is as follows:
·
A Value
Added Tax (VAT) to fund domestic military spending and domestic discretionary
spending with a rate between 10% and 13%, which makes sure very American pays
something.
·
Personal
income surtaxes on joint and widowed filers with net annual incomes of $100,000
and single filers earning $50,000 per year to fund net interest payments, debt
retirement and overseas and strategic military spending and other international
spending, with graduated rates between 5% and 25% in either 5% or 10%
increments. Heirs would also pay taxes
on distributions from estates, but not the assets themselves, with
distributions from sales to a qualified ESOP continuing to be exempt.
·
Employee
contributions to Old Age and Survivors Insurance (OASI) with a lower income
cap, which allows for lower payment levels to wealthier retirees without making
bend points more progressive.
·
A
VAT-like Net Business Receipts Tax (NBRT), essentially a subtraction VAT with
additional tax expenditures for family support,
health care and the private delivery of governmental services, to fund
entitlement spending and replace income tax filing for most people (including
people who file without paying), the corporate income tax, business tax filing
through individual income taxes and the employer contribution to OASI, all
payroll taxes for hospital insurance, disability insurance, unemployment
insurance and survivors under age sixty.
Lessons
from the Great Recession
The 2008 Recession triggered by our continuing
asset-based Depression has both temporary and permanent effects on the trust
fund’s cash flow. The temporary effect was a decline in revenue caused by a
slower economy and the temporary cut in payroll tax rates to provide stimulus
that has since been repealed, although the amount was added to the Trust Fund
for later withdrawal, regardless of contributions not made.
The permanent effect is the early retirement of
many who had planned to work longer, but because of the recent recession and
slow recovery, this cohort has decided to leave the labor force for good when
their extended unemployment ran out. This cohort is the older 77ers and 99ers
who needed some kind of income to survive. The combination of age
discrimination and the ability to retire has led them to the decision to retire
before they had planned to do so, which impacts the cash flow of the trust
fund, but not the overall payout (as lower benefit levels offset the impact of
the decision to retire early on their total retirement cost to the system). In addition, it has been made easier for
workers over 50 to retire on disability (as I have done), with many of us
approved on the first try.
The
Reagan-Pepper Compromise
When Social Security was saved in the early
1980s, payroll taxes were increased to build up a Trust Fund for the retirement
of the Baby Boom generation. The building of this allowed the government to use
these revenues to finance current operations, allowing the President and his
allies in Congress to honor their commitment to preserving the last increment
of his signature tax cut.
This trust fund is now coming due, so it is
entirely appropriate to rely on increased income tax revenue to redeem them. It
would be entirely inappropriate to renege on these promises by further
extending the retirement age, cutting promised Medicare benefits or by enacting
an across the board increase to the OASI payroll tax as a way to subsidize
current spending or tax cuts.
The cash flow problem currently experienced by
the trust fund is not the trust fund’s problem, but a problem for the Treasury
to address, either through further borrowing – which will require continued
comity on renewing the debt limit – or the preferable solution, which higher
taxes for those who received the lion’s share of the benefit’s from the tax
cuts of 1981, 1986, 2001, 2003 and 2010.
Many also complain that this recovery is anemic. That is likely because too many upper-middle
income taxpayers were given a permanent tax cut from 2001. Less savings and more taxation would boost
spending on
both transfer payments and government purchases
– especially transfers to the retired and disabled.
The cost
of delaying actions to address Social Security’s fiscal challenges for workers
and beneficiaries.
Actions should be taken as soon as possible,
especially when they must be phased in, as it is a truism that a little action
early will have a larger impact later.
This should not be done, however, as an excuse
to use regressive Old Age and Survivors Insurance payroll taxes to subsidize
continued tax cuts on the top 20% of wage earners who pay the majority of
income taxes. Retirement on Social Security for those at the lowest levels is
still inadequate. Any change to the program should, in time, allow a more
comfortable standard of living in retirement.
The ultimate cause of the trust fund’s long
term difficulties is not financial but demographic. Thus, the solution must
also be demographic – both in terms of population size and income distribution.
The largest demographic problem facing Social Security and the health care
entitlements, Medicare and Medicaid, is the aging of the population. In the
long term, the only solution for that aging is to provide a decent income for
every family through more generous tax benefits.
The free market will not provide this support
without such assistance, preferring instead to hire employees as cheaply as
possible. Only an explicit subsidy for family size overcomes this market
failure, leading to a reverse of the aging crisis.
We propose a $1000 per month refundable child
tax credit payable with wages as part of our proposal for a Net Business
Receipts Tax. This will take away the
disincentive to have kids a slow economy provides. Within twenty years, a
larger number of children born translates into more workers, who in another
decade will attain levels of productivity large enough to reverse the
demographic time bomb faced by Social Security in the long term.
Such an approach is superior to proposals to
enact personal savings accounts as an addition to Social Security, as such
accounts implicitly rely on profits from overseas labor to fund the dividends
required to fill the hole caused by the aging crisis. This approach cannot
succeed, however, as newly industrialized workers always develop into consumers
who demand more income, leaving less for dividends to finance American retirements.
The answer must come from solving the demographic problem at home, rather than
relying on development abroad.
This proposal will also reduce the need for
poor families to resort to abortion services in the event of an unplanned
pregnancy. Indeed, if state governments were to follow suit in increasing child
tax benefits as part of coordinated tax reform, most family planning activities
would be to increase, rather than prevent, pregnancy. It is my hope that this
fact is not lost on the Pro-Life Community, who should score support for this
plan as an essential vote in maintaining a perfect pro-life voter rating.
This is not to say that there is no room for
reform in the Social Security program. Indeed, comprehensive tax reform at the
very least requires calculating a new tax rate for the Old Age and Survivors
Insurance program. My projection is that a 6.5% rate on net income for
employees and employers (or 13% total) will collect about the same revenue as
currently collected for these purposes, excluding sums paid through the
proposed enhanced child tax credit. This calculation is, of course, subject to
revision.
While these taxes could be merged into the net
business income/revenue tax, VAT or the Fair Tax as others suggest, doing so
makes it more complicated to enact personal retirement accounts. My proposal
for such accounts differs from the plan offered in by either the Cato Institute
or the Bush Commission (aka the President’s Commission to Save Social
Security).
As I wrote in the January 2003 issue of Labor
and Corporate Governance, I would equalize the employer contribution based on
average income rather than personal income. I would also increase or eliminate
the cap on contributions. The higher the income cap is raised, the more likely
it is that personal retirement accounts are necessary.
A major strength of Social Security is its
income redistribution function. I suspect that much of the support for personal
accounts is to subvert that function – so any proposal for such accounts must
move redistribution to account accumulation by equalizing the employer
contribution.
I propose directing personal account
investments to employer voting stock, rather than an index funds or any fund
managed by outside brokers. There are no Index Fund billionaires (except those
who operate them). People become rich by owning and controlling their own
companies. Additionally, keeping funds in-house is the cheapest option
administratively. I suspect it is even cheaper than the Social Security system
– which operates at a much lower administrative cost than any defined
contribution plan in existence.
Safety is, of course, a concern with personal
accounts. Rather than diversifying through investment, however, I propose
diversifying through insurance. A portion of the employer stock purchased would
be traded to an insurance fund holding shares from all such employers.
Additionally, any personal retirement accounts shifted from employee payroll
taxes or from payroll taxes from non-corporate employers would go to this fund.
The insurance fund will save as a safeguard
against bad management. If a third of shares were held by the insurance fund
than dissident employees holding 25.1% of the employee-held shares (16.7% of
the total) could combine with the insurance fund held shares to fire management
if the insurance fund agreed there was cause to do so. Such a fund would make
sure no one loses money should their employer fail and would serve as a sword
of Damocles’ to keep management in line. This is in contrast to the Cato/ PCSSS
approach, which would continue the trend of management accountable to no one.
The other part of my proposal that does so is representative voting by
occupation on corporate boards, with either professional or union personnel
providing such representation.
The suggestions made here are much less
complicated than the current mix of proposals to change bend points and make
OASI more of a needs based program. If the personal account provisions are
adopted, there is no need to address the question of the retirement age.
Workers will retire when their dividend income is adequate to meet their
retirement income needs, with or even without a separate Social Security
program.
No other proposal for personal retirement
accounts is appropriate. Personal accounts should not be used to develop a new
income stream for investment advisors and stock traders. It should certainly not
result in more “trust fund socialism” with management that is accountable to no
cause but short term gain. Such management often ignores the long-term
interests of American workers and leaves CEOs both over-paid and unaccountable
to anyone but themselves.
Progressives should not run away from proposals
to enact personal accounts. If the proposals above are used as conditions for
enactment, I suspect that they won’t have to. The investment sector will run
away from them instead and will mobilize their constituency against them. Let
us hope that by then workers become invested in the possibilities of reform.
All of the changes proposed here work more
effectively if started sooner. The sooner that the income cap on contributions
is increased or eliminated, the higher the stock accumulation for individuals
at the higher end of the age cohort to be covered by these changes – although
conceivably a firm could be allowed to opt out of FICA taxes altogether
provided they made all former workers and retirees whole with the equity they
would have otherwise received if they had started their careers under a
reformed system. I suspect, though, that most will continue to pay
contributions, with a slower phase in – especially if a slower phase in leaves
current management in place.
One new wrinkle is that I would also put a
floor in the employer contribution to OASI, ending the need for an EITC – the
loss would be more than up by gains from an equalized employer contribution –
as well as lowering the ceiling on benefits. Since there will be no cap on the
employer contribution, we can put in a lower cap for the employee contribution
so that benefit calculations can be lower for wealthier beneficiaries, again
reducing the need for bend points.
Thank you for the opportunity to address the
committee. We are, of course, available
for direct testimony or to answer questions by members and staff.
