Ensuring Social Security Serves America’s Veterans

Comments for the Record

United States House of Representatives

Committee on Ways and Means

Social Security Subcommittee

Hearing on Ensuring Social Security Serves America’s Veterans

Wednesday, February 7, 2018, 9:00 AM

By Michael G. Bindner

Center for Fiscal Equity

Chairman Johnson and Ranking Member Larson, thank you for the opportunity to submit my comments on this topic. The hearing will focus on the Social Security Administration’s initiatives to reduce processing times and expedite claims for certain veterans, as well as efforts by the agency to hire veterans. We will leave these topics to Agency witnesses and explain how veteran retirement benefits; health care and other retirement might fight within our proposals. 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.

We believe in holistic retirement. In other words, instead of building a variety of pensions, assets are pooled into one place and retirement paid by the major employer, which for many workers in the future the one where they were last an employee-owner.

Firms employing qualified veterans would accept either a cash payment from the Department of Veterans Affairs or would be able to adjust their net business receipts taxes over time to add additional preferred shares or voting shares (depending on whether a cooperative or corporate model of governance is chosen) in time for retirement. Some credit might be taken from any Value Added Tax if such a tax is used to fund veteran’s affairs in the future.

Cooperative firms would fund veterans’ health care needs, either at their preferred facilities or DVA hospitals or medical facilities. If a veteran would move to a new employer, his or her stock would be traded to the receiving firm, including the VA entitlement.

Of course, before we replace Social Security with cooperative or ESOP pensions and include veterans accordingly, we must first save it (although EPI notes, correctly, that using realistic rather than conservative estimates has the program solvent as far as the eye can see.

As I 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.

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.

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 bet that this 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.

One final feature needs to mentioned. In the employee owned corporation or cooperative of the future, CEOs will not be commanding huge salaries but will be bidding for their positions in open auction, including three and four-star flag officers recruited from retirement.

While they can certainly spend or save the dividends earned from either voting or preferred shares, competition with other managers or retirees will be required to keep base pay from reaching even the high six figures, let alone seven. Employee-owned firms do not bribe generals, although we will give them a bonus for any contributions they make in either engineering, leadership or marketing.

All veterans will have the same options for taking dividends as current pay rather than saving them for retirement.

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.