Complexities and Challenges of Social Security Coverage and Payroll Tax Compliance for State and Local Governments

Comments for the Record

United States House of Representatives

Committee on Ways and Means

Social Security Subcommittee

Oversight Subcommittee

Joint Hearing on the Complexities and Challenges of

Social Security Coverage and Payroll Tax Compliance for

State and Local Governments

Thursday, June 29, 2017, 10:00 AM

By Michael G. Bindner

Center for Fiscal Equity

Chairmen Johnson and Buchanan and Ranking Members Larson and Lewis, thank you for the opportunity to submit my comments on this topic. We will leave it to the invited witnesses to comment on how states and territories voluntarily participate in Social Security. Our comments will address how to stabilize state and local retirement plans in the short term and how state and local government personnel might fare under our proposal in the long run.    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.

The Current State and Local Pension Crisis

In cities and states hit hardest by the Great Recession, among them Chicago and Michigan, both loss of tax revenue and investment assets doomed once solvent retirement plans to funds that needed to be bailed out.  Some of the urgency behind this issue likely also came from a financial sector that was hungry for a new source of fees, which converting from defined benefit plans to defined contribution plans would surely provide.  More than a few campaign contributions were likely made to speed this process.  Even though the economy is bouncing back with home prices, we are likely not done with attempts to raid state retirement programs.

While some privatization could be healthy, as I describe below, trust fund socialism where public assets are used to make CEOs all the more unaccountable to shareholders by insulating them with mutual funds only increases the economic uncertainty faced by the American workers who voted to Make America Great Again.  The proposals below make CEOs more accountable to worker-stockholders in ways never seen before, although these will take time.  Some pension funds in the Rust Belt don’t have time.  For them action is required now.

At President Clinton’s Social Security Summit, the school solution seemed to include adding state and local workers to Social Security as a way to stabilize Social Security.  It turns out that it is even more important to do this to stabilize the retirement of government workers, although giving them a program like FERS, where they do have personal savings and a residual government pension, is the best thing for the interim.

I would hope that your witnesses can describe how to ramp up efforts so that state and local systems can be added to Social Security en masse.

Social Security Personal Accounts

In our proposal, Social Security contributions from employers are incorporated into the Net Business Receipts Tax (Subtraction VAT).  One feature of the tax could be personal accounts for Social Security holding employer voting stock and shares of an insurance fund hold employee-owned firms.

As we wrote in the January 2003 issue of Labor and Corporate Governance, we would equalize the employer contribution based on average income rather than personal income. We 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. We 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.

We 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. we 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, we 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.

State and Local Government

At first, state and local governments will go on as they do now, however eventually both capitalist and employee-owned firms will take advantage of offsets in the NBRT that allow alternative funding of government services, from road construction, maintenance, fire safety and police to schools, mental health, hospitals and adjust education (much of current corrections could be handled by mental health systems if easy exit is reformed).  Larger firms in “company towns” may have a virtual monopoly on industrial jobs and government services.  Larger cities may have more than one large cooperative employer. 

Larger cooperatives who take on most or all government functions would “buy out” the Social Security and pension contributions to the federal and local systems and replace them with company voting stock and the insurance trust fund discussed above.  A collection of smaller or larger cooperatives, however, might share public service functions between them.  Such providers would have their own stock and might receive cooperative or stock shares from the major employers in their city or county.  Their workers would have some say in cooperative matters and the cooperatives would have some say in their management.  Of course, non-profits would receive non-voting share and would not necessarily offer formal decision roles to employer partners, but they may have democratic governance through client families, like school boards.

One example of inter-linked cooperatives would be large city transportation and electricity companies who would build and maintain an electric car network (maybe with fusion power) which would also provide electricity to businesses and homes.  Stakeholders with interlocking shares would include road construction firms, firm that would provide computer control, the local power company, possibly one or more automotive manufacturers and the local employers, especially cooperative ones.  Individual workers would have shares in their own firm as well as partner firms, depending on capital requirements and the need for employee and consumer democracy.  No doubt that some of the workers on the public payroll currently would be subsumed into these enterprises, such as the local department of public works or energy cooperative.  Not a bad future.

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.