As nations move toward democracy and a free market they find themselves in possession of state-controlled industries that are better run as private sector enterprises. This is easier said than done. In the former Soviet Union, shares were distributed to employees while the currency was collapsing. The Russian workers did not know that the stock price was not as important as the maintenance of control, so they sold their seemingly worthless shares to the agents of what are now the Oligarchs. It will now take decades to undo the damage of a badly implemented privatization. Had these shares been held in trust and voted by occupational group, the rise of the Oligarchs might not have happened.
To reverse this trend in Russia, both a progressive tax system and a Social Security system are necessary. A Social Security system is developed in the way I have outlined above, with an employee contribution based on income and an employer contribution based on the average income in the federation. The employer contribution is paid in stock with structures in place so that management does not control how that stock is voted. Employee committees organized by trade union or professional society controls his stock, which is not available for sale until retirement. When enough stock has been purchased, profit is distributed to workers based on the labor cost as a percentage of total costs, with a separate capital distribution to the owners of capital, including the worker-shareholders. If these steps are taken, the oligarchy is overcome, bit-by-bit.
We welcomed then-President Putin’s ongoing investigation into how the oligarchy concentrated power. To the extent that corruption was used, sanctions criminal sanctions are needed against the oligarchs and their assets seized and redistributed to the employees.
Russia is also in dire need of infrastructure repairs and the modernization of agriculture. Construction contractors are needed to build roads. Set these firms up along the lines of Cooperativism. Contractors are also required to share their profits equitably as a contract condition. Roads are financed either through direct budget funding or through a license to charge user tolls. A commodity market and system of food storage reserves is to be set up along the American model. The world does not need to provide food aid to Russia. It needs to buy food from Russia.
Most of what I have said about Russia is applicable to China, where the connected have by and large circumvented the workers right to control the means of production. The prospects in China are dimmer, however, absent a revolution overthrowing the Communist Party. With the rise of a middle class in China and the continued tendency by its government toward repression, some type of revolution is almost inevitable. When it occurs, those corrupt officials who have deprived Chinese workers of their ownership rights are likely to be held to account, and the ownership of factories returned to workers.
There are likely firms in Russia, the other Republics of the former Soviet Union, China, Vietnam, Cambodia and Laos that have not been looted by party members or other Oligarchs. These are easily privatized. To do so, first determine the initial share distribution. Add the total number of worker-months for the active employees and give each worker one share for every month they have worked at the enterprise. Form caucuses of each occupational group and have them elect members to the board of directors based on their relative number of shares held. Shares are restricted from sale until retirement, so as not to repeat the mistakes of the recent past. After this is done, bring in consultants to determine the capital requirements for modernization. If debt is required and credit available, incur it. If debt cannot be procured, value the existing company compared to its value after modernization and set the value of the shares to be sold accordingly. For example, if the workers hold 100,000 shares and modernization doubles the value of the company, then the amount of shares to be created is an additional 100,000 and the value of each share is 1/100,000 of the total financed in the capital markets.
With the development of third world multi-nationals, converting formerly communist enterprise to 21st Century Economics speeds the world to a new economy and a new polity.
Thursday, July 10, 2003
Saturday, May 10, 2003
Cooperative Careers - Mutual Self Ownership
Younger Workers
Currently, younger workers begin their careers in high school doing menial labor for the minimum wage, often without regard to talent, unless they have parental connections, in which case their employment is still often without regard to talent. During this period, middle class youth get the best jobs and are supported partially or totally by their parents. Lower class and immigrant youth are forced into the worst jobs, perpetuating class divisions in society. Young women who get pregnant are encouraged to have an abortion, give their child up for adoption or go on welfare. Less than a century ago, pregnancy meant a wedding to the child’s father, who was able to find a job or was given or sold a farm to support his family. Perhaps it is time to learn from the past.
Young people between the ages of 16 and 20 on an academic track work in the home growing food for their families under the guidance of their parents. If their parents have paid for their homes and retired, they assist them in any home based business undertaken as a second career. Students attending a faith-based school work part of the time in the related institution’s social service activities, possibly assisting older retirees in growing their food in exchange for housing and a stipend or working in a medical, psychiatric or educational institution. Students also work in secular educational or social service agencies.
Young people on a non-academic track attend a vocational/technical institute under the sponsorship of their future employer and are paid by that employer, provided room and board and work a limited number of hours in their chosen trade. They also enter this track by joining a union as an apprentice.
Students in this age group who have less than a tenth grade level of literacy in the dominant language have as their primary duty the pursuit of their education and are provided tuition, room and board in a setting to facilitate this. No other work is required of them.
Young people with families are entitled to the child care tax credit through their employer or school, as described in the essay on structural reform of the tax code. At this age, young people marry if both individuals have the emotional maturity for that level of commitment. Whether parents or not, single or married, these individuals are treated like adults, including the right to vote and to serve in the military (if there is such a thing – see the essay on world peace). Treating young people with respect and providing them with opportunity has them make better choices, lessening promiscuity and drug abuse.
Students on the academic track earn given an associates degree when they have completed their educations. Students who advance to a skill level equal to the fourteenth grade level are allowed to graduate early, regardless of the number of credit hours accumulated. During this time they have sampled various disciplines and have some idea of their advanced educational needs, while others complete their general educations and enter the workforce. Students who wish to go on find an employer to sponsor their major course and graduate work. While pursing their educations they are provided room, board, a salary and practical work experience with the sponsoring employer. After graduation, they work for two years for every year of advanced education received. Workers who leave work or are terminated before their work requirement ends are responsible for repaying a portion of their tuition on a pro rata basis through a governmentally sponsored student loan.
Students seeking a legal education take accounting, politics and those courses that many individuals take privately to prepare for the LSAT test as the first year of a four-year legal curriculum. Students seeking a career teaching college receive courses in education, as well as the academic discipline that they profess. With other employers providing work upon graduation in other fields, universities best serve their own interests by limiting admissions for professorial candidates to the number of available positions at the other end.
Medical Education
The crisis in nursing is best remedied by changing how doctors are trained. Prior to attending medical school, students are required to earn a nursing credential and practice for two years as a Registered Nurse. This increases both the number of nurses and provides new doctors with an experience that they do not forget; changing forever the way nurses are treated. This training also provides the type of clinical experience that makes the long hours expected of medical residents less necessary. Students then attend medical school and complete their residency with much more practical knowledge and less of a need to work mind-numbing hours. As with other professions, students seek employment at the start of their training in nursing and are paid and housed throughout their early careers by the sponsoring health care system or hospital. At each stage of the training process, the wage rate is constant, from nursing school to the end of residency. Paying nurses and residents the same also increase camaraderie on the ward. Young doctors make less while in residency than they currently do, but they make more at the beginning and end their residencies debt free. Nurses who do not go on to advanced training in medicine begin to accumulate stock in their health system or hospital at an earlier age and are able to retire younger than their colleagues who continue in medicine. Those who do continue on into medicine are able to join a group practice, continue with the hospital or health system or work independently eight years after completing their medical degrees. Pay differentials in medicine decrease, as this system allows all who are capable to practice medicine at a just pay rate, increasing the number of doctors to what society needs. Under the laws of supply and demand, a plentiful supply of physicians lowers the price of medicine. However, doctors who provide innovative care, contributing to the state of the art in medicine, make more because of their innovation, whether inside or outside a sponsored system.
Mid-career Workers
After individuals have completed their service requirements (whatever their level of education), they continue on with the employing firm or find a position with a competitor. At this point they move out of company provided housing and purchase an environmentally efficient 21st century home, with or without food production facilities. Those who forgo growing their own food receive a higher salary, although their work day is correspondingly longer. Their employer, who may arrange for the building of the home, finances their home loan. At this stage, employees begin to accumulate stock in an Employee Stock Ownership Plan (ESOP). The loan maturity is timed to match the time when the ESOP shares provide enough of a return to pay in benefits what the worker makes as a salary, as well as additional accumulation of shares so that between dividends and share buy-back these shares last for the remainder of the individual’s and their spouse’s expected life span. This home is replaced with a larger dwelling as children are born, with adjustments for the state of upkeep and additional mortgage costs partially financed by the family size tax credit. When the family shrinks as children reach maturity, the home is replaced with a smaller dwelling, if so desired, with additional proceeds leading to a shorter work life as any profits are split between a decrease in the home loan debt and additional ESOP shares.
Worker salaries are fairly even, with payment for longevity reflected in a higher return on ESOP shares, some of which is taken in cash rather than reinvested. Workers also receive payments for innovation or sales that demonstrably increase the profitability of the firm. These payments are in both stock and cash to reflect both current and future higher earnings of the firm. On the other end of the performance spectrum, workers who do not do well are evaluated to determine the cause. If needed, employees are referred to employee assistance programs if drug or alcohol abuse or mental illness is the cause. Workers who require retraining are retrained, with a slight lengthening of the employment contract. If entire cohorts of employees are less productive because of the advance of technology, their home loans are forgiven and their retirement plans are made whole. Laying workers off as they near retirement eligibility as a cost avoidance measure is longer practiced by 21st Century employee-owned firms.
Retirement
After the mortgage is paid and adequate stock accumulated, the worker is eligible to retire. The stock benefit is approximately the same as the full salary. The worker can keep working at double salary, freelance in his profession, or teach younger workers. Even if the retiree does none of these, taking the food production option means continued activity growing food. When the individual is no longer able to farm, assistance is available through the firm or house of worship, which arranges for a young family to assist in the production of food and upkeep in exchange for housing and a stipend. When the retiree or spouse needs full time hospital care it is covered by the firm’s insurance plan. Retirees continue to vote their remaining shares in the ESOP, which need not be sold during their lifetimes. Their wisdom is useful in the deliberations of the firm. Spouses, however, sell back their shares upon the death of the retiree, in exchange for an annuity sponsored by either the company or the individual’s house of worship. Retirees and their spouses also purchase a negative mortgage from the company or their house of worship, so that the home then reverts to the firm or church upon their deaths. If a worker dies before retirement, the surviving spouse is made whole in terms of pension and mortgage forgiveness (provided there has been no foul play). Children do not expect to inherit a large estate. Instead, they inherit a system that provides them the opportunity to excel to the best of their ability and be rewarded for it.
Currently, younger workers begin their careers in high school doing menial labor for the minimum wage, often without regard to talent, unless they have parental connections, in which case their employment is still often without regard to talent. During this period, middle class youth get the best jobs and are supported partially or totally by their parents. Lower class and immigrant youth are forced into the worst jobs, perpetuating class divisions in society. Young women who get pregnant are encouraged to have an abortion, give their child up for adoption or go on welfare. Less than a century ago, pregnancy meant a wedding to the child’s father, who was able to find a job or was given or sold a farm to support his family. Perhaps it is time to learn from the past.
Young people between the ages of 16 and 20 on an academic track work in the home growing food for their families under the guidance of their parents. If their parents have paid for their homes and retired, they assist them in any home based business undertaken as a second career. Students attending a faith-based school work part of the time in the related institution’s social service activities, possibly assisting older retirees in growing their food in exchange for housing and a stipend or working in a medical, psychiatric or educational institution. Students also work in secular educational or social service agencies.
Young people on a non-academic track attend a vocational/technical institute under the sponsorship of their future employer and are paid by that employer, provided room and board and work a limited number of hours in their chosen trade. They also enter this track by joining a union as an apprentice.
Students in this age group who have less than a tenth grade level of literacy in the dominant language have as their primary duty the pursuit of their education and are provided tuition, room and board in a setting to facilitate this. No other work is required of them.
Young people with families are entitled to the child care tax credit through their employer or school, as described in the essay on structural reform of the tax code. At this age, young people marry if both individuals have the emotional maturity for that level of commitment. Whether parents or not, single or married, these individuals are treated like adults, including the right to vote and to serve in the military (if there is such a thing – see the essay on world peace). Treating young people with respect and providing them with opportunity has them make better choices, lessening promiscuity and drug abuse.
Students on the academic track earn given an associates degree when they have completed their educations. Students who advance to a skill level equal to the fourteenth grade level are allowed to graduate early, regardless of the number of credit hours accumulated. During this time they have sampled various disciplines and have some idea of their advanced educational needs, while others complete their general educations and enter the workforce. Students who wish to go on find an employer to sponsor their major course and graduate work. While pursing their educations they are provided room, board, a salary and practical work experience with the sponsoring employer. After graduation, they work for two years for every year of advanced education received. Workers who leave work or are terminated before their work requirement ends are responsible for repaying a portion of their tuition on a pro rata basis through a governmentally sponsored student loan.
Students seeking a legal education take accounting, politics and those courses that many individuals take privately to prepare for the LSAT test as the first year of a four-year legal curriculum. Students seeking a career teaching college receive courses in education, as well as the academic discipline that they profess. With other employers providing work upon graduation in other fields, universities best serve their own interests by limiting admissions for professorial candidates to the number of available positions at the other end.
Medical Education
The crisis in nursing is best remedied by changing how doctors are trained. Prior to attending medical school, students are required to earn a nursing credential and practice for two years as a Registered Nurse. This increases both the number of nurses and provides new doctors with an experience that they do not forget; changing forever the way nurses are treated. This training also provides the type of clinical experience that makes the long hours expected of medical residents less necessary. Students then attend medical school and complete their residency with much more practical knowledge and less of a need to work mind-numbing hours. As with other professions, students seek employment at the start of their training in nursing and are paid and housed throughout their early careers by the sponsoring health care system or hospital. At each stage of the training process, the wage rate is constant, from nursing school to the end of residency. Paying nurses and residents the same also increase camaraderie on the ward. Young doctors make less while in residency than they currently do, but they make more at the beginning and end their residencies debt free. Nurses who do not go on to advanced training in medicine begin to accumulate stock in their health system or hospital at an earlier age and are able to retire younger than their colleagues who continue in medicine. Those who do continue on into medicine are able to join a group practice, continue with the hospital or health system or work independently eight years after completing their medical degrees. Pay differentials in medicine decrease, as this system allows all who are capable to practice medicine at a just pay rate, increasing the number of doctors to what society needs. Under the laws of supply and demand, a plentiful supply of physicians lowers the price of medicine. However, doctors who provide innovative care, contributing to the state of the art in medicine, make more because of their innovation, whether inside or outside a sponsored system.
Mid-career Workers
After individuals have completed their service requirements (whatever their level of education), they continue on with the employing firm or find a position with a competitor. At this point they move out of company provided housing and purchase an environmentally efficient 21st century home, with or without food production facilities. Those who forgo growing their own food receive a higher salary, although their work day is correspondingly longer. Their employer, who may arrange for the building of the home, finances their home loan. At this stage, employees begin to accumulate stock in an Employee Stock Ownership Plan (ESOP). The loan maturity is timed to match the time when the ESOP shares provide enough of a return to pay in benefits what the worker makes as a salary, as well as additional accumulation of shares so that between dividends and share buy-back these shares last for the remainder of the individual’s and their spouse’s expected life span. This home is replaced with a larger dwelling as children are born, with adjustments for the state of upkeep and additional mortgage costs partially financed by the family size tax credit. When the family shrinks as children reach maturity, the home is replaced with a smaller dwelling, if so desired, with additional proceeds leading to a shorter work life as any profits are split between a decrease in the home loan debt and additional ESOP shares.
Worker salaries are fairly even, with payment for longevity reflected in a higher return on ESOP shares, some of which is taken in cash rather than reinvested. Workers also receive payments for innovation or sales that demonstrably increase the profitability of the firm. These payments are in both stock and cash to reflect both current and future higher earnings of the firm. On the other end of the performance spectrum, workers who do not do well are evaluated to determine the cause. If needed, employees are referred to employee assistance programs if drug or alcohol abuse or mental illness is the cause. Workers who require retraining are retrained, with a slight lengthening of the employment contract. If entire cohorts of employees are less productive because of the advance of technology, their home loans are forgiven and their retirement plans are made whole. Laying workers off as they near retirement eligibility as a cost avoidance measure is longer practiced by 21st Century employee-owned firms.
Retirement
After the mortgage is paid and adequate stock accumulated, the worker is eligible to retire. The stock benefit is approximately the same as the full salary. The worker can keep working at double salary, freelance in his profession, or teach younger workers. Even if the retiree does none of these, taking the food production option means continued activity growing food. When the individual is no longer able to farm, assistance is available through the firm or house of worship, which arranges for a young family to assist in the production of food and upkeep in exchange for housing and a stipend. When the retiree or spouse needs full time hospital care it is covered by the firm’s insurance plan. Retirees continue to vote their remaining shares in the ESOP, which need not be sold during their lifetimes. Their wisdom is useful in the deliberations of the firm. Spouses, however, sell back their shares upon the death of the retiree, in exchange for an annuity sponsored by either the company or the individual’s house of worship. Retirees and their spouses also purchase a negative mortgage from the company or their house of worship, so that the home then reverts to the firm or church upon their deaths. If a worker dies before retirement, the surviving spouse is made whole in terms of pension and mortgage forgiveness (provided there has been no foul play). Children do not expect to inherit a large estate. Instead, they inherit a system that provides them the opportunity to excel to the best of their ability and be rewarded for it.
Saturday, March 15, 2003
Pay Equity
For union and employee-ownership to realize their full potentials, pay is equalized to the greatest extent possible. To do this, firms account for the determinants of pay.
Management Pay and Selection
As long as there is a division of labor, some form of management hierarchy is required to operate the firm, even the union or employee-owned firm. The average worker, given no organization or command structure, does not work otherwise; or their work does not mean anything in relation to the work of others. However, there is no economic reason why those in positions of authority need to receive higher compensation (aside from an age premium). It is likely that the only real reason managers get paid more is that they control the money. If this is true it is an abuse of trust.
In a free market to give orders to someone else you pay them. The same should be true in an organization. Given a common pool of labor, for one worker to tell other workers what to do he should pay a price, possibly taking a salary reduction to be in charge of his fellows. His task is different than those of his fellows, but it is no more essential than the labor itself.
Retrain managers in the union or employee-owned workplace to cope with an ownership culture that emphasizes training and team building. Union shareholders insist upon management selection and salary determination structures based on competitive bidding for management positions within the firm by all qualified applicants and selection by those managed at the shop floor level and higher. Such structures go hand in hand with such technologies as Total Quality Management, whose flaw may be that they drive responsibility to the lowest possible level without at the same time adjusting salary structures to reflect this. Pay for supervisors is no longer set by higher-level employees, rather a free market for wages is created in the firm. The floor price in auctions for management positions is the average wage of the employees supervised. In the event more than one bidder proposes the average wage, an election is held among all of those supervised to pick the supervisor. First line supervisors have a relatively small electorate. The entire division or corporation elects corporate division heads or CEOs.
Innovation
Another determinant of pay is contribution. Union-owned firms inaugurate incentive systems to reward actual performance rather than conformity within a hierarchical structure. Currently, higher contributing employees tend to receive higher wages with the expectation that they will perform. Pay for contribution is a good thing, but can be awarded AFTER a demonstrable contribution to the firm is made, rather than before.
If salaries are equalized, patents and innovations are more handsomely rewarded, encouraging these activities. Incentive systems include the decision structures used to identify particular innovations or actions that resulted in short or long term profitability and to assign credit for these actions. Incentives are awarded on an individual or a group basis, depending upon the contribution. If an individual invents something, secures a long-term client, or in some way avoids a loss he or she is granted both a cash incentive and stock awards to reflect the makes to the long-term profitability of the firm. This reward is determined through democratic, rather than hierarchical means. Incentive systems are necessary to reward initiative and attract the best workers, which increases market share and lead other firms to adopt this type of structure.
Cooperativism is healthier psychologically, engendering self-actualizing behavior. In this system, all members of society, all things being equal, have the opportunity to rise to their full potential with limited sacrifice. When they achieve their potential (and no healthy person stops short, given the opportunity) they are giving their maximum effort to society. At their point of maximum fulfillment their contribution is equal to all others who are giving their maximum.
Education
Some employees are determined to be more valuable because of their level of education or training. Union-owned firms are able to develop an edge in recruitment and training systems by providing both tuition and pay during training and education. They recruit the best and brightest individuals prior to technical training or during their college careers. In exchange employees finance an equal share of their tuition through a student loan that the firm repays for the new employee over a period of years (two years of work for each year of education). The employer also provides off-campus living arrangements and paid work experience as a supplement to education. Such a system removes the financial risk from the employee and transfers it to the employer, which contributes to a culture of equality and flatter wage structures in the firm. The firm expects to pay a lower wage later on but gets the more talented workers sooner. Those who leave early reimburse the company for whatever portion of their educational debt remains unpaid at separation. As college costs go up and student debt mounts, such an arrangement seems inevitable, especially for those students who come from families who are less "credit worthy." Workers who have already self-financed their educations are awarded an up-front bonus in cash and stock to compensate them for their educations, rather than a higher salary. Pay differentials that reflect educational sacrifice no longer make sense when workers are educated to their full potential at company expense.
An economics that is overtly Christian makes other statements about pay differentials that secular economics cannot. Pay differentials due to ability are no longer justified, as abilities are gifts from God - not the property of the individual. Working in an area where one’s talents and interests do not lie not only does not make sense for the individual, but also is an abuse of what God has provided. Higher pay for doing something one does not love cannot compensate the psychic pain inherent in such a choice. It is better that all work using their God-given talents and be happy. In a system of equal base pay, working too hard is no longer necessary. Workers are able to earn a just wage, covering their supply cost of labor, while doing so.
The Supply Cost of Labor
Conventional economics holds that the supply curve for labor goes up with more wages offered,- the higher the wage the more willing the worker, all other things being equal. Of course, all other things are never equal. A more important determinant of supply cost is economic need. Labor and the wages gathered from it are the way the worker obtains all other economic goods. This means that the supply curve for labor has a negative curve - the lower the wage the more one works. The more the worker needs, the more he or she works at a given wage. If the wage is lowered, the worker works more. As wages rise, work goes down. Most do not work 60 to 80 hour weeks because they can afford not to. This is why poor people work such long hours while the rich take time off (though some dedicated professionals, especially doctors, do not. However, this has more to do with duty than economics).
The level of income a worker requires is relative to a "just wage." The just wage is the wage required to maintain the worker and the worker's dependents (who he cannot morally allow to go hungry). This wage covers, at minimum, shelter, food (energy for work), clothing, transportation to and from work, and a reasonable amount of leisure. Also within such a wage are all taxes and social insurance contributions, health care and insurance costs and religious tithes. If a worker's main job is not enough to cover these costs moonlighting occurs, workers organize and strike or welfare is sought - as it is more just to go on the dole than to work as a slave.
Family Support
In a more paternalistic era, employees received a higher salary when they had a child, meeting their supply cost of coming to work. Such a direct payment has been replaced by pay for seniority. Labor-owned firms include a compensation system that links pay to the number of dependents supported by the worker. This is an option that employee-owned firms find attractive that traditional firms do not attempt. Employee-ownership allows the payment of a lower base rate while meeting the supply costs of the employee.
Many workers are forced to accept the best job they can, or work more than one job, in order to meet their supply costs. If everyone knew their supply cost of labor they would not work for anything less, provided government assistance or funded education is available for not working. Put another way, it is not justified to force someone to work for under his or her supply cost of labor; it is in fact slavery.
If the entire union-owned sector adopts such a system, it can demand federal and state tax credits to fund this expenditure, which truly benefits society at large. Dependent allowances of this type are needed nationwide. Returning to the topic of the January 2003 PVS newsletter, the Social Security liquidity crisis is ultimately an aging crisis. The most reliable way to reverse this crisis is for society to explicitly reward childbirth. It is also a way to forever end the debate on abortion, as any pro-life politician who does not seize upon this solution as the way to end abortion has other agendas involving the domination of women, rather than the protection of children. Finally, many members of organized labor are uncomfortable with labor's association with the pro-choice movement. Labor's adoption of such a child-birth incentive only helps bring the traditional progressive coalition back together again.
Older Workers
Another component of the supply cost of labor is the perceived length of life. Older employees have a higher supply cost for their labor. Two factors account for this. The first is that they no longer feel immortal, so they consider their time to be more scarce and therefore more valuable. Younger workers work for less, because they perceive, quite intelligently, that they have time on their side. A way to compensate older workers for their higher supply cost is to transfer a portion of their compensation to stock dividends, which are reinvested for retirement or taken as a direct payment, or some combination of the two. Shifting compensation in this way removes the existing perverse incentive to fire older more productive employees and replace them with younger workers. If a worker arrives mid-career, the worker is given the option to invest a portion of any accumulated retirement funds in shares of the new firm or the Union ESOP Trust.
Expanded Benefits
Higher pay is also a retention tool to reward longevity. There are other ways to do this. In union-owned operations overseas, expanded benefit levels are a common feature, especially in the financial area. Possible options to be adopted include limited payroll line of credit accounts and low interest home mortgages in cooperation with employee credit unions. Such accounts are used as a retention incentive. The term of the home loan and the planned retirement date are matched so that at loan maturity the number of ESOP shares held provides for payment an amount equal to the base salary. Provisions are made to refinance loans of employees who terminate before maturity at a reasonable rate. Failure to provide such a refinancing option, especially in firms with mixed ownership, constitutes peonage.
Issuing credit to employees at no or very low interest makes good sense in firm entirely owned by its workers, as interest fees are simply rechanneled back to profit and then redistributed again to the employees as shareholders. Interest is only required to compensate non-employee shareholders. When outside investors are bought out, interest is eliminated. This takes credit unions to the next level by merging the employer and the credit union and accessing the capital accumulation of the firm to make home loans.
Efficiency and Social Justice
An equal pay/incentive based system is a better way to allocate positions. Perfectly competitive labor markets produce an average wage, once other factors have been compensated for (family size, education) or provided for through making education and training freely available. After such factors as age, education, position and family size are factored out or compensated for separately, a perfectly competitive base wage is achieved through supply and demand. In a perfectly competitive labor market, if one factor is less productive, less of that factor is purchased. If another factor is calling for a higher price, than means are undertaken to produce more of that factor (providing education to enough of the higher paid factor to decrease the price). Worker deployment follows productivity, as it does in any free market. If less janitors are needed, less are hired, so the demand for janitors and the wage they are paid reflects their utility to the company, not the prejudices of the ruling hierarchy. It is not economically efficient to have workers who, at a base level of effort and ability, are not as productive as other workers. All contribute equal effort to the final product, with only the innovators and superior performers receiving increased compensation.
In a free market, if janitors are paid less than line workers there are too many janitors. Efforts are made to overcome the effects of discrimination in the education and employment system, so that those janitors who are capable of other duties are trained and hired in order to maximize their natural abilities. Both basic justice and good sense demand that menial laborers be offered all the education they can use in a culturally sensitive manner. I have heard too many stories of foreign doctors driving cabs or engineers operating dry cleaning establishments. Under-utilizing these individuals is both inefficient and wrong.
The last determinant of pay is discrimination based on race, gender or immigration status. These are no longer dignified in an employee-owned firm. The system set out above eliminates these ugly features from employee compensation forever. Indeed, smarter firms out and train socially disadvantaged individuals, as the likelihood of finding untapped genius within them is greater than in the population of white males.
Management Pay and Selection
As long as there is a division of labor, some form of management hierarchy is required to operate the firm, even the union or employee-owned firm. The average worker, given no organization or command structure, does not work otherwise; or their work does not mean anything in relation to the work of others. However, there is no economic reason why those in positions of authority need to receive higher compensation (aside from an age premium). It is likely that the only real reason managers get paid more is that they control the money. If this is true it is an abuse of trust.
In a free market to give orders to someone else you pay them. The same should be true in an organization. Given a common pool of labor, for one worker to tell other workers what to do he should pay a price, possibly taking a salary reduction to be in charge of his fellows. His task is different than those of his fellows, but it is no more essential than the labor itself.
Retrain managers in the union or employee-owned workplace to cope with an ownership culture that emphasizes training and team building. Union shareholders insist upon management selection and salary determination structures based on competitive bidding for management positions within the firm by all qualified applicants and selection by those managed at the shop floor level and higher. Such structures go hand in hand with such technologies as Total Quality Management, whose flaw may be that they drive responsibility to the lowest possible level without at the same time adjusting salary structures to reflect this. Pay for supervisors is no longer set by higher-level employees, rather a free market for wages is created in the firm. The floor price in auctions for management positions is the average wage of the employees supervised. In the event more than one bidder proposes the average wage, an election is held among all of those supervised to pick the supervisor. First line supervisors have a relatively small electorate. The entire division or corporation elects corporate division heads or CEOs.
Innovation
Another determinant of pay is contribution. Union-owned firms inaugurate incentive systems to reward actual performance rather than conformity within a hierarchical structure. Currently, higher contributing employees tend to receive higher wages with the expectation that they will perform. Pay for contribution is a good thing, but can be awarded AFTER a demonstrable contribution to the firm is made, rather than before.
If salaries are equalized, patents and innovations are more handsomely rewarded, encouraging these activities. Incentive systems include the decision structures used to identify particular innovations or actions that resulted in short or long term profitability and to assign credit for these actions. Incentives are awarded on an individual or a group basis, depending upon the contribution. If an individual invents something, secures a long-term client, or in some way avoids a loss he or she is granted both a cash incentive and stock awards to reflect the makes to the long-term profitability of the firm. This reward is determined through democratic, rather than hierarchical means. Incentive systems are necessary to reward initiative and attract the best workers, which increases market share and lead other firms to adopt this type of structure.
Cooperativism is healthier psychologically, engendering self-actualizing behavior. In this system, all members of society, all things being equal, have the opportunity to rise to their full potential with limited sacrifice. When they achieve their potential (and no healthy person stops short, given the opportunity) they are giving their maximum effort to society. At their point of maximum fulfillment their contribution is equal to all others who are giving their maximum.
Education
Some employees are determined to be more valuable because of their level of education or training. Union-owned firms are able to develop an edge in recruitment and training systems by providing both tuition and pay during training and education. They recruit the best and brightest individuals prior to technical training or during their college careers. In exchange employees finance an equal share of their tuition through a student loan that the firm repays for the new employee over a period of years (two years of work for each year of education). The employer also provides off-campus living arrangements and paid work experience as a supplement to education. Such a system removes the financial risk from the employee and transfers it to the employer, which contributes to a culture of equality and flatter wage structures in the firm. The firm expects to pay a lower wage later on but gets the more talented workers sooner. Those who leave early reimburse the company for whatever portion of their educational debt remains unpaid at separation. As college costs go up and student debt mounts, such an arrangement seems inevitable, especially for those students who come from families who are less "credit worthy." Workers who have already self-financed their educations are awarded an up-front bonus in cash and stock to compensate them for their educations, rather than a higher salary. Pay differentials that reflect educational sacrifice no longer make sense when workers are educated to their full potential at company expense.
An economics that is overtly Christian makes other statements about pay differentials that secular economics cannot. Pay differentials due to ability are no longer justified, as abilities are gifts from God - not the property of the individual. Working in an area where one’s talents and interests do not lie not only does not make sense for the individual, but also is an abuse of what God has provided. Higher pay for doing something one does not love cannot compensate the psychic pain inherent in such a choice. It is better that all work using their God-given talents and be happy. In a system of equal base pay, working too hard is no longer necessary. Workers are able to earn a just wage, covering their supply cost of labor, while doing so.
The Supply Cost of Labor
Conventional economics holds that the supply curve for labor goes up with more wages offered,- the higher the wage the more willing the worker, all other things being equal. Of course, all other things are never equal. A more important determinant of supply cost is economic need. Labor and the wages gathered from it are the way the worker obtains all other economic goods. This means that the supply curve for labor has a negative curve - the lower the wage the more one works. The more the worker needs, the more he or she works at a given wage. If the wage is lowered, the worker works more. As wages rise, work goes down. Most do not work 60 to 80 hour weeks because they can afford not to. This is why poor people work such long hours while the rich take time off (though some dedicated professionals, especially doctors, do not. However, this has more to do with duty than economics).
The level of income a worker requires is relative to a "just wage." The just wage is the wage required to maintain the worker and the worker's dependents (who he cannot morally allow to go hungry). This wage covers, at minimum, shelter, food (energy for work), clothing, transportation to and from work, and a reasonable amount of leisure. Also within such a wage are all taxes and social insurance contributions, health care and insurance costs and religious tithes. If a worker's main job is not enough to cover these costs moonlighting occurs, workers organize and strike or welfare is sought - as it is more just to go on the dole than to work as a slave.
Family Support
In a more paternalistic era, employees received a higher salary when they had a child, meeting their supply cost of coming to work. Such a direct payment has been replaced by pay for seniority. Labor-owned firms include a compensation system that links pay to the number of dependents supported by the worker. This is an option that employee-owned firms find attractive that traditional firms do not attempt. Employee-ownership allows the payment of a lower base rate while meeting the supply costs of the employee.
Many workers are forced to accept the best job they can, or work more than one job, in order to meet their supply costs. If everyone knew their supply cost of labor they would not work for anything less, provided government assistance or funded education is available for not working. Put another way, it is not justified to force someone to work for under his or her supply cost of labor; it is in fact slavery.
If the entire union-owned sector adopts such a system, it can demand federal and state tax credits to fund this expenditure, which truly benefits society at large. Dependent allowances of this type are needed nationwide. Returning to the topic of the January 2003 PVS newsletter, the Social Security liquidity crisis is ultimately an aging crisis. The most reliable way to reverse this crisis is for society to explicitly reward childbirth. It is also a way to forever end the debate on abortion, as any pro-life politician who does not seize upon this solution as the way to end abortion has other agendas involving the domination of women, rather than the protection of children. Finally, many members of organized labor are uncomfortable with labor's association with the pro-choice movement. Labor's adoption of such a child-birth incentive only helps bring the traditional progressive coalition back together again.
Older Workers
Another component of the supply cost of labor is the perceived length of life. Older employees have a higher supply cost for their labor. Two factors account for this. The first is that they no longer feel immortal, so they consider their time to be more scarce and therefore more valuable. Younger workers work for less, because they perceive, quite intelligently, that they have time on their side. A way to compensate older workers for their higher supply cost is to transfer a portion of their compensation to stock dividends, which are reinvested for retirement or taken as a direct payment, or some combination of the two. Shifting compensation in this way removes the existing perverse incentive to fire older more productive employees and replace them with younger workers. If a worker arrives mid-career, the worker is given the option to invest a portion of any accumulated retirement funds in shares of the new firm or the Union ESOP Trust.
Expanded Benefits
Higher pay is also a retention tool to reward longevity. There are other ways to do this. In union-owned operations overseas, expanded benefit levels are a common feature, especially in the financial area. Possible options to be adopted include limited payroll line of credit accounts and low interest home mortgages in cooperation with employee credit unions. Such accounts are used as a retention incentive. The term of the home loan and the planned retirement date are matched so that at loan maturity the number of ESOP shares held provides for payment an amount equal to the base salary. Provisions are made to refinance loans of employees who terminate before maturity at a reasonable rate. Failure to provide such a refinancing option, especially in firms with mixed ownership, constitutes peonage.
Issuing credit to employees at no or very low interest makes good sense in firm entirely owned by its workers, as interest fees are simply rechanneled back to profit and then redistributed again to the employees as shareholders. Interest is only required to compensate non-employee shareholders. When outside investors are bought out, interest is eliminated. This takes credit unions to the next level by merging the employer and the credit union and accessing the capital accumulation of the firm to make home loans.
Efficiency and Social Justice
An equal pay/incentive based system is a better way to allocate positions. Perfectly competitive labor markets produce an average wage, once other factors have been compensated for (family size, education) or provided for through making education and training freely available. After such factors as age, education, position and family size are factored out or compensated for separately, a perfectly competitive base wage is achieved through supply and demand. In a perfectly competitive labor market, if one factor is less productive, less of that factor is purchased. If another factor is calling for a higher price, than means are undertaken to produce more of that factor (providing education to enough of the higher paid factor to decrease the price). Worker deployment follows productivity, as it does in any free market. If less janitors are needed, less are hired, so the demand for janitors and the wage they are paid reflects their utility to the company, not the prejudices of the ruling hierarchy. It is not economically efficient to have workers who, at a base level of effort and ability, are not as productive as other workers. All contribute equal effort to the final product, with only the innovators and superior performers receiving increased compensation.
In a free market, if janitors are paid less than line workers there are too many janitors. Efforts are made to overcome the effects of discrimination in the education and employment system, so that those janitors who are capable of other duties are trained and hired in order to maximize their natural abilities. Both basic justice and good sense demand that menial laborers be offered all the education they can use in a culturally sensitive manner. I have heard too many stories of foreign doctors driving cabs or engineers operating dry cleaning establishments. Under-utilizing these individuals is both inefficient and wrong.
The last determinant of pay is discrimination based on race, gender or immigration status. These are no longer dignified in an employee-owned firm. The system set out above eliminates these ugly features from employee compensation forever. Indeed, smarter firms out and train socially disadvantaged individuals, as the likelihood of finding untapped genius within them is greater than in the population of white males.
Saturday, February 15, 2003
Corporate Governance - ESOPs and Unions
In an article published in January 2003 issue of PVS Labor and Corporate Governance, I challenged the conventional progressive view of Social Security Reform and how organized labor might take advantage of the debate to improve conditions for American workers. This second essay details how to use Taft-Hartley pension funds or Personal Retirement Account funds controlled by labor to expand ownership and create the workplace of the future. Since its first posting on this site, this essay has been expanded with additional material, so much material that the Pay Equity portion has been moved to its own page.
Many readers of the January article expressed consternation with why PVS published an article suggesting compromise at this stage of the debate (including those readers in the Investment Management office of the AFL-CIO, who were so confused they had this article killed). In this essay, I explore how changing the assumptions behind how business is managed makes such a discussion worth Labor’s while. I highlight the differences between traditional firms and employee-owned firms and the implication of these differences for management and financial systems. This examination and the essay that follows on pay equity set out ways that employee-owned firms might do things differently, taking their performance to the next level.
The Social Context of Ownership
Traditional capitalist firms are organized on a principal-agent model. The organizational culture is best described as hierarchical. The purpose of these organizations is to maximize value for the shareholders. Employees in this schema are dispensable factors of production. While more enlightened management treat the employees as stakeholders, the purpose of doing so is to improve the value of the company for its shareholders, as is expected given the assumptions of Capitalism. More often than not, however, the actions of management are designed to encourage conformity to the norms and goals of the organization, rather than to encourage original thinking. Given the hierarchical organizational culture of most firms, originality by the vast majority of the employees is neither encouraged nor rewarded. In the rare case where such systems do exist, the lion’s share of the reward for innovation goes to shareholders and to management. Inventors within the system receive a small bonus for a patent, but often such rewards are a pittance compared to the value added by the invention. In traditional firms, scientists and engineers are rewarded with higher salaries up front. These salaries are related to the credentials they hold. The expectation is that in reward for these salaries, any invention is the property of the shareholders or proprietors. In exchange for assuming all of the financial risk, the traditional owners claim all, or most, of the rewards.
In the capitalist firm all profits go to the fiduciary owners of the firm, while none go to the employees. The implication here is that the owners of the firm own the labor, as well as the value produced by the firm's assets. This loss of ownership leads to the alienation of the worker from his work, as others have described. Workers put themselves into their labor and their most valuable resource, their time. Claiming ownership of another’s time on the planet without just compensation is tantamount to slavery. The only way to overcome this condition is through the just distribution of profit and ownership.
A Different Mindset
The challenge for labor and for employee-owners is step out of the traditional environment and an adversarial relationship with management and step into the possibility of a whole new paradigm of ownership. This mindset emphasizes worker democracy and equality while at the same time encourages individual achievement. The survival of a union or employee owned firm (or any firm) depends on its ability to achieve and adapt. To overcome the authoritarianism of Capitalism institutional systems must change. Most firms controlled by Employee Stock Ownership Plans (ESOPs) still contain hierarchical vestiges in pay and share distribution. Lower level employees are still regarded as expendable in many such firms. Overcoming these tendencies is important in realizing the potential of employee ownership.
Profit Distribution
One area ripe for paradigm shift is the distribution of profit. All profit need not go to the shareholders, even the employee-shareholders. Instead, profit is distributed based on the ownership of the factor employed. I reject the traditional economic tenet that wages are an adequate compensation for the inherent right of employees to a share in the profit of what is produced. As I demonstrate below, wage levels are determined by a variety of factors (most of which do not involve a free market for labor) and in many cases do not even reimburse the employee for the supply cost of labor. For example, if labor costs are forty percent of the cost of a product, then forty percent of the profit is justly distributed to the workers (regardless of the ownership share by the employees). Profits from material, and plant and equipment costs are justly distributed to the shareholders (including employee shareholders). Potentially, in labor-owned firms, the workers get two profit distributions, which beats zero (the status quo) any day. To approach a redistribution of profit, however, workers are to be adequately represented on corporate and ESOP trust boards and receive an equitable share distribution.
Board Representation and Share Distribution
Union ESOP shareholders insist that firms and ESOP trusts update their board structures so that each major ownership faction is fairly represented, including management shareholders, labor employee shareholders and professional employee shareholders, as applicable to the structure of the firm. This restructuring includes a method to assure that factional votes on the ESOP board are reflected in votes of the board of directors in those firms that are not wholly owned by the ESOP.
Currently, the majority of ESOPs distribute shares based on salary. This has the potential to demotivate lower salaried and shorter-term employees. When lower salaried employees receive less of an ownership share than higher salaried employees, they perceive the difference and adjust their conduct accordingly. Vesting requirements also play a role in this, especially those that require a "probationary" year of service prior to participation in an ESOP program. This is why organized labor continues to see many ESOPs as a vehicle to fund management using ERISA. Only by equalizing the basic share grant for each employee (rather than linking it so salary) is this perception overcome.
Union ESOP shareholders develop more equal share distribution and dividend reinvestment structures. Ideally, shares are distributed without regard to salary level; with each full-time employee getting the same number of shares (and part-timers getting a percentage of that). Share accumulation starts at day one, rather than after a year of service, which is the current practice in many firms. In today’s economy, where employees work at a firm for a few years and then move on, waiting any time period for a piece of the action has serious retirement and wealth consequences. Some mechanism is necessary so that long-term temporary employees are compensated with shares from the client firm. Temporary employment has its place in a flexible economy, but not as an excuse to deny workers the ownership benefits that they deserve. All of this leads to the heart of the matter, how managers are selected and employees are paid.
Adopting an Ownership Culture in Organized Labor
Union-owned firms must develop a profitability culture of ownership, as must unions who move from more diversified investment to direct ownership. Such a culture highlights team building with management and professionals and de-emphasizes work rules that maximize employment rather than safety. Firms that practice these principles innovate more and are more productive, so their profits are higher. Even taking into account the increased share paid to workers, investors are attracted to these firms, as they produce a higher dividend. As importantly, these firms get the best workers, the ones who work well and innovate. These firms win market share, as their products are newer and better. Other firms adapt to these methods or disappear.
The creation of Personal Retirement Accounts as part of Social Security Reform is one way to increase employee ownership. Another way for unions to tackle this issue is to restructure their pension fund operations. A portion of these funds is used to exercise direct control over the firms at which members work. This occurs through the creation of ESOPs, the direct voting by employees or by union investment agents, such as PVS or the union local itself, voting in the interest of member workers. In some cases, the result of such a conversion is voting control or control of enough shares so that the union employees at the firm have a significant voice in the management of the firm. The majority of ESOP conversion clients are privately held firms that are held by their founders and transferred to employees. Unions use the same types of capital credit mechanisms used to create ESOPs to buy out non-employee shareholders.
Expanding ownership brings the union movement into the Twenty-first Century and ultimately fulfills the long-term goal of workers controlling the means of production. After workers are in control, they adopt a more equitable pay structure than exists in traditional firms. In the short term, adopting these proposals gives both non-union laborers and professionals an additional incentive to organize. More than anything else, these strategies reverse the decline in union membership as a share of the workforce.
Many readers of the January article expressed consternation with why PVS published an article suggesting compromise at this stage of the debate (including those readers in the Investment Management office of the AFL-CIO, who were so confused they had this article killed). In this essay, I explore how changing the assumptions behind how business is managed makes such a discussion worth Labor’s while. I highlight the differences between traditional firms and employee-owned firms and the implication of these differences for management and financial systems. This examination and the essay that follows on pay equity set out ways that employee-owned firms might do things differently, taking their performance to the next level.
The Social Context of Ownership
Traditional capitalist firms are organized on a principal-agent model. The organizational culture is best described as hierarchical. The purpose of these organizations is to maximize value for the shareholders. Employees in this schema are dispensable factors of production. While more enlightened management treat the employees as stakeholders, the purpose of doing so is to improve the value of the company for its shareholders, as is expected given the assumptions of Capitalism. More often than not, however, the actions of management are designed to encourage conformity to the norms and goals of the organization, rather than to encourage original thinking. Given the hierarchical organizational culture of most firms, originality by the vast majority of the employees is neither encouraged nor rewarded. In the rare case where such systems do exist, the lion’s share of the reward for innovation goes to shareholders and to management. Inventors within the system receive a small bonus for a patent, but often such rewards are a pittance compared to the value added by the invention. In traditional firms, scientists and engineers are rewarded with higher salaries up front. These salaries are related to the credentials they hold. The expectation is that in reward for these salaries, any invention is the property of the shareholders or proprietors. In exchange for assuming all of the financial risk, the traditional owners claim all, or most, of the rewards.
In the capitalist firm all profits go to the fiduciary owners of the firm, while none go to the employees. The implication here is that the owners of the firm own the labor, as well as the value produced by the firm's assets. This loss of ownership leads to the alienation of the worker from his work, as others have described. Workers put themselves into their labor and their most valuable resource, their time. Claiming ownership of another’s time on the planet without just compensation is tantamount to slavery. The only way to overcome this condition is through the just distribution of profit and ownership.
A Different Mindset
The challenge for labor and for employee-owners is step out of the traditional environment and an adversarial relationship with management and step into the possibility of a whole new paradigm of ownership. This mindset emphasizes worker democracy and equality while at the same time encourages individual achievement. The survival of a union or employee owned firm (or any firm) depends on its ability to achieve and adapt. To overcome the authoritarianism of Capitalism institutional systems must change. Most firms controlled by Employee Stock Ownership Plans (ESOPs) still contain hierarchical vestiges in pay and share distribution. Lower level employees are still regarded as expendable in many such firms. Overcoming these tendencies is important in realizing the potential of employee ownership.
Profit Distribution
One area ripe for paradigm shift is the distribution of profit. All profit need not go to the shareholders, even the employee-shareholders. Instead, profit is distributed based on the ownership of the factor employed. I reject the traditional economic tenet that wages are an adequate compensation for the inherent right of employees to a share in the profit of what is produced. As I demonstrate below, wage levels are determined by a variety of factors (most of which do not involve a free market for labor) and in many cases do not even reimburse the employee for the supply cost of labor. For example, if labor costs are forty percent of the cost of a product, then forty percent of the profit is justly distributed to the workers (regardless of the ownership share by the employees). Profits from material, and plant and equipment costs are justly distributed to the shareholders (including employee shareholders). Potentially, in labor-owned firms, the workers get two profit distributions, which beats zero (the status quo) any day. To approach a redistribution of profit, however, workers are to be adequately represented on corporate and ESOP trust boards and receive an equitable share distribution.
Board Representation and Share Distribution
Union ESOP shareholders insist that firms and ESOP trusts update their board structures so that each major ownership faction is fairly represented, including management shareholders, labor employee shareholders and professional employee shareholders, as applicable to the structure of the firm. This restructuring includes a method to assure that factional votes on the ESOP board are reflected in votes of the board of directors in those firms that are not wholly owned by the ESOP.
Currently, the majority of ESOPs distribute shares based on salary. This has the potential to demotivate lower salaried and shorter-term employees. When lower salaried employees receive less of an ownership share than higher salaried employees, they perceive the difference and adjust their conduct accordingly. Vesting requirements also play a role in this, especially those that require a "probationary" year of service prior to participation in an ESOP program. This is why organized labor continues to see many ESOPs as a vehicle to fund management using ERISA. Only by equalizing the basic share grant for each employee (rather than linking it so salary) is this perception overcome.
Union ESOP shareholders develop more equal share distribution and dividend reinvestment structures. Ideally, shares are distributed without regard to salary level; with each full-time employee getting the same number of shares (and part-timers getting a percentage of that). Share accumulation starts at day one, rather than after a year of service, which is the current practice in many firms. In today’s economy, where employees work at a firm for a few years and then move on, waiting any time period for a piece of the action has serious retirement and wealth consequences. Some mechanism is necessary so that long-term temporary employees are compensated with shares from the client firm. Temporary employment has its place in a flexible economy, but not as an excuse to deny workers the ownership benefits that they deserve. All of this leads to the heart of the matter, how managers are selected and employees are paid.
Adopting an Ownership Culture in Organized Labor
Union-owned firms must develop a profitability culture of ownership, as must unions who move from more diversified investment to direct ownership. Such a culture highlights team building with management and professionals and de-emphasizes work rules that maximize employment rather than safety. Firms that practice these principles innovate more and are more productive, so their profits are higher. Even taking into account the increased share paid to workers, investors are attracted to these firms, as they produce a higher dividend. As importantly, these firms get the best workers, the ones who work well and innovate. These firms win market share, as their products are newer and better. Other firms adapt to these methods or disappear.
The creation of Personal Retirement Accounts as part of Social Security Reform is one way to increase employee ownership. Another way for unions to tackle this issue is to restructure their pension fund operations. A portion of these funds is used to exercise direct control over the firms at which members work. This occurs through the creation of ESOPs, the direct voting by employees or by union investment agents, such as PVS or the union local itself, voting in the interest of member workers. In some cases, the result of such a conversion is voting control or control of enough shares so that the union employees at the firm have a significant voice in the management of the firm. The majority of ESOP conversion clients are privately held firms that are held by their founders and transferred to employees. Unions use the same types of capital credit mechanisms used to create ESOPs to buy out non-employee shareholders.
Expanding ownership brings the union movement into the Twenty-first Century and ultimately fulfills the long-term goal of workers controlling the means of production. After workers are in control, they adopt a more equitable pay structure than exists in traditional firms. In the short term, adopting these proposals gives both non-union laborers and professionals an additional incentive to organize. More than anything else, these strategies reverse the decline in union membership as a share of the workforce.
Wednesday, January 15, 2003
Social Security and Ownership
This essay was originally published in the January 2003 issue of Labor and Corporate Governance, The PVS Monthly Review of Multi-employer Plan Proxy Issues. It was a two part essay. The second part has not yet been published due to confusion in the AFL-CIO investment management office as to why these issues are being raised now.
The conventional wisdom among progressives regarding Social Security is that any privatization is to be avoided at all costs. In this month's LCG, the first of a two-part series, author Michael Bindner attempts to challenge the conventional wisdom of the political left surrounding Social Security privatization by highlighting how current reform proposals could in fact be used to advance a progressive ownership agenda for working Americans. The views expressed here are that of the author and do not necessarily reflect the opinion of PVS, its clients, or the AFL-CIO.
Setting the Stage for Political Debate
On December 21st, 2001, the President's Commission to Strengthen Social Security, chaired by former New York Senator Patrick Moynihan, released its recommendations in a report entitled Strengthening Social Security and Creating Personal Wealth for All Americans. The President's Commission called for a yearlong debate on retirement security, with no action until after the 2002 election cycle. During that year, the matter was briefly raised as an election issue, although by and large it was overshadowed by tax policy and the pending war.
In many Congressional races during the last election cycle, Republican candidates shied away from the President's proposals. Although the Republicans now have slim majorities in both chambers of Congress, the majority in the Senate is still less than 60 votes. This means that unilateral action by the Republicans will not be possible on this issue. If the President is serious about bringing private ownership to Social Security, he will have to modify his proposals to make them politically acceptable to labor and other constituencies.
Organized labor has two choices. The first is to stand firm against privatization and assure that nothing passes. The other is to seek modifications in the President's proposal to benefit organized labor. Modifications can be of two types. The first type could improve the workability of any privatization plan, while the second can be considered a poison pill, which would ultimately make any legislation unpalatable for its original supporters. Whether an amendment is perfecting or a poison pill rests in the minds of the privatizers. My aim is to list possible improvements to make the proposal more acceptable to labor, although many on the right may consider them killing amendments. Ultimately, the fate of the recommendations of the President's Commission come down to the President's desire, or lack thereof, to compromise enough with organized labor and to force his own supporters to compromise.
Presidential Commission Recommendation
The commission's chief recommendation in the report was that some portion of Social Security tax revenue should be directed to personal retirement accounts. Funds for these accounts would be collected from employees and employers through the current payroll tax system. A federal Governing Board modeled after the federal Thrift Savings Plan and the Federal Reserve Board would manage the program. This design is meant to duplicate the low administrative costs of the current Social Security program, which it would augment. Part of the Board's charge will be to find ways to speed the reconciliation process between fund collection and the crediting of accounts, which can last well over a year.
Personal accounts would be invested in a two-tier system. Tier I will be managed by the Governing Board, who will contract management to multiple fund managers on a competitive basis. It will include three indexed balanced funds (conservative, medium, and growth) or any combination of five index funds patterned after the federal Thrift Savings Plan, as well as an inflation-protected bond fund. There will be a default standard fund for participants who do not make a fund choice. Private sector account managers will manage Tier II. Participants will be allowed to make Tier II investments after their funds have accumulated to a set amount. The Commission recommends that the private sector fund managers vote equity shares in both tiers, as is the case with the Thrift Savings Plan and private sector mutual funds. Clearly, this could have major implications for proxy voting down the road. Exactly how is too early to say.
If Organized Labor is willing to seek a compromise, a natural proposal would be to insist that the Personal Retirement Accounts created using Social Security funds be managed within the Taft Hartley system, rather than by investment managers operating independently under contract to the Governing Board proposed above. Of course, some may consider such a proposal a poison pill, though it need not be.
Three Models Being Proposed
Model One proposes that 2% of income be diverted to personal accounts, with no other changes to Social Security. Optional within this model is to transfer these funds from the General Fund rather than redirecting the funds from Social Security, or to combine the two approaches. Model Two redirects four percent of income to personal accounts, with a limit on accounts of $1,000 in any given year. For long-term actuarial balance, benefits would be adjusted for price inflation, rather than for wage inflation ? which means that retirees and disabled workers would lose purchasing power relative to workers, but not relative to prices. Model Three requires an additional employee contribution of 1% of income, to be matched by a diversion of 2.5% of income up to $1,000 (which means that higher wage workers can contribute quite a sum, even though the amount diverted from current payroll taxes is capped at a lower level). Because wealthier employees can contribute so much more, the bend point used to calculate benefits would be adjusted so that the benefit payout is less generous than it is currently. Additionally, inflation would be indexed to gains in life expectancy, which will result in annual growth of 0.5% over price inflation. Both Models Two and Three also include a guaranteed minimum benefit, which is linked to the poverty level.
The President's Commission went to great pains to assure that distributional equity is maintained in Models Two and Three. While the sentiment is admirable, organized labor should insist that the outcome be even more progressive than the current program. A starting point in doing so is to recalculate how contributions are credited to American workers. Currently, the employer contribution is credited as a match to the employee contribution. Meanwhile, benefits are linked to average income. This perceived imbalance is a driving force behind the move to create private accounts, because wealthier taxpayers believe they do not receive nearly what they contribute. Changing the way that accounts are credited will change this perception. The key lies in the way the employer match is calculated. Instead of basing the employer contribution on the employee contribution, credit each full-time worker at the firm at the average contribution for such workers in the nation as a whole. Part-time workers would be credited at a separate rate, at some percentage of the full-time rate based on the number of hours worked in the quarter. This result will bring contributions more in line with expected benefits. Even if organized labor opposes all of the President's proposals, advocating this accounting change will be of great benefit to workers, as it will take much of the wind out of the sails of privatization advocates. Of course, my experience debating conservatives on this issue is that their major complaint with Social Security is not the involvement of the government, but the re-distributional nature of the program itself, especially as it impacts the upper middle class. Given this, such a proposal might also be a poison pill.
Alternative Solution: Establish ESOPs!
No provision is made in the Commission's recommendations for Employee Stock Ownership Plans, even voluntarily. Unlike the kind of "trust fund socialism" proposed by the President?s Commission, the inclusion of an ESOP component would encourage employee productivity and may well provide that extra edge needed to overcome a part of the long-long term actuarial deficit in the nation's retirement system.
The Iowa Center for Fiscal Equity proposes that Personal Retirement Accounts include an ESOP option. To incorporate ESOPs, employer and employee contributions should be considered separately in funding personal accounts; with the employee contribution funding diversified personal accounts as proposed by the Commission. Under Model One, 1% of individual income would be transferred to personal accounts or funded from the General Fund. Under Model Two, 2% of income up to $500 could be transferred to personal accounts. Under Model Three, after an additional 0.5% individual contribution, 1.25% of income up to $500 could be transferred to personal accounts.
The employer contribution could be paid to an ESOP, at the option of the employee, rather than to the government. Separate ESOPs should be established for each type of worker (union, professional, management) or each type of worker should be represented on the ESOP board (with union employees represented through the union). The amount contributed to the ESOP reflects the rebasing of the employer contribution on the average wage. Under Model One, the employer would contribute 1% of average income to the ESOP for each employee, regardless of wage, rather than contributing it to FICA. Under Model Two the employer contribution would be 2% of average income. Under Model Three, the employer would contribute an additional 0.5% of average income to the ESOP for each employee, as well as redirecting 1.25% from FICA. The following chart illustrates this breakdown.
If increasing diversification is a goal (although there is nothing more diversified than an economy wide social insurance system), some portion of the employer contribution might be invested with the employee contribution, with the remainder going to the ESOP.
To prevent workers from losing their ESOP savings, some form of insurance for ESOP contributions in the manner that the FDIC insures deposits should be created. Such an insurance plan would provide the safety net required to protect workers against bad actors and might include a regulatory component for added security. Eventually, contributions (not share value) to 401(k) accounts might also be insured.
Average income can be calculated in different ways for the purposes of the employer contribution. Different averages can be credited for full-time and part-time workers. The average can be for the firm or for the economy at-large. If a firm average is used, contract and temporary workers should be included in the average for the client firm. If the national average is used, the amount paid into FICA by the firm should be adjusted so that the total cost to the firm of the employer contribution is the same percentage of payroll as the current obligation.
Employer contributions based on average income would be a change in the way most ESOPs distribute shares to their employees, as the common method is as a percentage of income. In my experience as an ESOP employee-owner, the current practice is demoralizing to lower salaried junior employees, causing retention problems. The effect of longevity should be enough to reward higher salaried employees and to provide them with enough control over the operation of the firm. Adding a differential based on wage is a perceived double hit on equity as seen by these employees. Additionally, the awarding of an equal number of shares each pay period to each employee prevents the kind of incentives found at Enron, especially if the award of additional shares are limited to rewarding results rather than salary level and are distributed to an entire work team. This development will also benefit workers, especially the rank and file.
Investing private account funds in ESOPs provides for a more direct avenue of investment in plant and equipment, rather than encouraging stock speculation and subsidizing mutual fund managers. It gives the employees of the firm an ownership incentive and long-term protection against layoffs, provided that employees also have the appropriate voice in the leadership of the firm, through their elected union representatives where applicable.
Forging Ahead
Labor organizations should seriously consider the President's proposals if doing so means a debate on union representation on corporate and ESOP boards, a long held demand of organized labor. The enactment of such structure might also encourage Union pension funds to convert a portion of their assets from diversified ownership to ESOP participation in the firms at which their members are employed (which I will address in my next article).
The final question addressed here is the shortfall in the Social Security system and how it might be funded. The existence of both private accounts and the ESOP option makes a discussion of raising or abolishing the income cap on contributions more palatable, as such an increase will raise the average income which can be invested in the ESOP trust fund. Higher percentage contributions would also be more acceptable to both employees and employers, provided that a portion of these increases goes to the personal and ESOP retirement accounts.
For progressives, increasing the income cap is more palatable than subsidizing Social Security privatization using the general fund. The President's Commission has recommended in two of its plans that this shortfall be paid out from the General Fund and that benefits be cut by changing the way inflation is calculated (making retirees foot the bill). When the General Fund is tapped for this purpose, either income tax rates must be raised or debt increased. Increases in the debt draw money from the same demographic as income taxes or increased payroll taxes, though the wealthy would much rather lend their money and receive interest than to have it confiscated. If the wealthy must be taxed, most seem to prefer income taxes so that they can attempt to shelter some or all of the money.
No matter how you slice it, however, upper income individuals will fund the difference. Assuring that they do so in a way which does not mortgage our children?s future is one area where organized labor can be effective in exacting concessions, although more than any other provision, insisting on higher payroll taxes may be considered a poison pill. How the White House and the Republican leadership in Congress respond to such proposals will be key to judging how seriously they are pursuing the creation of Personal Retirement Accounts.
Part II in the February issue:
Look for Part Two of this series in the February LCG where Mr. Bindner will detail how Taft-Hartley pension funds, or Personal Retirement Account funds controlled by labor, might be used to leverage expanded ownership and create the workplace of the future.
The conventional wisdom among progressives regarding Social Security is that any privatization is to be avoided at all costs. In this month's LCG, the first of a two-part series, author Michael Bindner attempts to challenge the conventional wisdom of the political left surrounding Social Security privatization by highlighting how current reform proposals could in fact be used to advance a progressive ownership agenda for working Americans. The views expressed here are that of the author and do not necessarily reflect the opinion of PVS, its clients, or the AFL-CIO.
Setting the Stage for Political Debate
On December 21st, 2001, the President's Commission to Strengthen Social Security, chaired by former New York Senator Patrick Moynihan, released its recommendations in a report entitled Strengthening Social Security and Creating Personal Wealth for All Americans. The President's Commission called for a yearlong debate on retirement security, with no action until after the 2002 election cycle. During that year, the matter was briefly raised as an election issue, although by and large it was overshadowed by tax policy and the pending war.
In many Congressional races during the last election cycle, Republican candidates shied away from the President's proposals. Although the Republicans now have slim majorities in both chambers of Congress, the majority in the Senate is still less than 60 votes. This means that unilateral action by the Republicans will not be possible on this issue. If the President is serious about bringing private ownership to Social Security, he will have to modify his proposals to make them politically acceptable to labor and other constituencies.
Organized labor has two choices. The first is to stand firm against privatization and assure that nothing passes. The other is to seek modifications in the President's proposal to benefit organized labor. Modifications can be of two types. The first type could improve the workability of any privatization plan, while the second can be considered a poison pill, which would ultimately make any legislation unpalatable for its original supporters. Whether an amendment is perfecting or a poison pill rests in the minds of the privatizers. My aim is to list possible improvements to make the proposal more acceptable to labor, although many on the right may consider them killing amendments. Ultimately, the fate of the recommendations of the President's Commission come down to the President's desire, or lack thereof, to compromise enough with organized labor and to force his own supporters to compromise.
Presidential Commission Recommendation
The commission's chief recommendation in the report was that some portion of Social Security tax revenue should be directed to personal retirement accounts. Funds for these accounts would be collected from employees and employers through the current payroll tax system. A federal Governing Board modeled after the federal Thrift Savings Plan and the Federal Reserve Board would manage the program. This design is meant to duplicate the low administrative costs of the current Social Security program, which it would augment. Part of the Board's charge will be to find ways to speed the reconciliation process between fund collection and the crediting of accounts, which can last well over a year.
Personal accounts would be invested in a two-tier system. Tier I will be managed by the Governing Board, who will contract management to multiple fund managers on a competitive basis. It will include three indexed balanced funds (conservative, medium, and growth) or any combination of five index funds patterned after the federal Thrift Savings Plan, as well as an inflation-protected bond fund. There will be a default standard fund for participants who do not make a fund choice. Private sector account managers will manage Tier II. Participants will be allowed to make Tier II investments after their funds have accumulated to a set amount. The Commission recommends that the private sector fund managers vote equity shares in both tiers, as is the case with the Thrift Savings Plan and private sector mutual funds. Clearly, this could have major implications for proxy voting down the road. Exactly how is too early to say.
If Organized Labor is willing to seek a compromise, a natural proposal would be to insist that the Personal Retirement Accounts created using Social Security funds be managed within the Taft Hartley system, rather than by investment managers operating independently under contract to the Governing Board proposed above. Of course, some may consider such a proposal a poison pill, though it need not be.
Three Models Being Proposed
Model One proposes that 2% of income be diverted to personal accounts, with no other changes to Social Security. Optional within this model is to transfer these funds from the General Fund rather than redirecting the funds from Social Security, or to combine the two approaches. Model Two redirects four percent of income to personal accounts, with a limit on accounts of $1,000 in any given year. For long-term actuarial balance, benefits would be adjusted for price inflation, rather than for wage inflation ? which means that retirees and disabled workers would lose purchasing power relative to workers, but not relative to prices. Model Three requires an additional employee contribution of 1% of income, to be matched by a diversion of 2.5% of income up to $1,000 (which means that higher wage workers can contribute quite a sum, even though the amount diverted from current payroll taxes is capped at a lower level). Because wealthier employees can contribute so much more, the bend point used to calculate benefits would be adjusted so that the benefit payout is less generous than it is currently. Additionally, inflation would be indexed to gains in life expectancy, which will result in annual growth of 0.5% over price inflation. Both Models Two and Three also include a guaranteed minimum benefit, which is linked to the poverty level.
The President's Commission went to great pains to assure that distributional equity is maintained in Models Two and Three. While the sentiment is admirable, organized labor should insist that the outcome be even more progressive than the current program. A starting point in doing so is to recalculate how contributions are credited to American workers. Currently, the employer contribution is credited as a match to the employee contribution. Meanwhile, benefits are linked to average income. This perceived imbalance is a driving force behind the move to create private accounts, because wealthier taxpayers believe they do not receive nearly what they contribute. Changing the way that accounts are credited will change this perception. The key lies in the way the employer match is calculated. Instead of basing the employer contribution on the employee contribution, credit each full-time worker at the firm at the average contribution for such workers in the nation as a whole. Part-time workers would be credited at a separate rate, at some percentage of the full-time rate based on the number of hours worked in the quarter. This result will bring contributions more in line with expected benefits. Even if organized labor opposes all of the President's proposals, advocating this accounting change will be of great benefit to workers, as it will take much of the wind out of the sails of privatization advocates. Of course, my experience debating conservatives on this issue is that their major complaint with Social Security is not the involvement of the government, but the re-distributional nature of the program itself, especially as it impacts the upper middle class. Given this, such a proposal might also be a poison pill.
Alternative Solution: Establish ESOPs!
No provision is made in the Commission's recommendations for Employee Stock Ownership Plans, even voluntarily. Unlike the kind of "trust fund socialism" proposed by the President?s Commission, the inclusion of an ESOP component would encourage employee productivity and may well provide that extra edge needed to overcome a part of the long-long term actuarial deficit in the nation's retirement system.
The Iowa Center for Fiscal Equity proposes that Personal Retirement Accounts include an ESOP option. To incorporate ESOPs, employer and employee contributions should be considered separately in funding personal accounts; with the employee contribution funding diversified personal accounts as proposed by the Commission. Under Model One, 1% of individual income would be transferred to personal accounts or funded from the General Fund. Under Model Two, 2% of income up to $500 could be transferred to personal accounts. Under Model Three, after an additional 0.5% individual contribution, 1.25% of income up to $500 could be transferred to personal accounts.
The employer contribution could be paid to an ESOP, at the option of the employee, rather than to the government. Separate ESOPs should be established for each type of worker (union, professional, management) or each type of worker should be represented on the ESOP board (with union employees represented through the union). The amount contributed to the ESOP reflects the rebasing of the employer contribution on the average wage. Under Model One, the employer would contribute 1% of average income to the ESOP for each employee, regardless of wage, rather than contributing it to FICA. Under Model Two the employer contribution would be 2% of average income. Under Model Three, the employer would contribute an additional 0.5% of average income to the ESOP for each employee, as well as redirecting 1.25% from FICA. The following chart illustrates this breakdown.
If increasing diversification is a goal (although there is nothing more diversified than an economy wide social insurance system), some portion of the employer contribution might be invested with the employee contribution, with the remainder going to the ESOP.
To prevent workers from losing their ESOP savings, some form of insurance for ESOP contributions in the manner that the FDIC insures deposits should be created. Such an insurance plan would provide the safety net required to protect workers against bad actors and might include a regulatory component for added security. Eventually, contributions (not share value) to 401(k) accounts might also be insured.
Average income can be calculated in different ways for the purposes of the employer contribution. Different averages can be credited for full-time and part-time workers. The average can be for the firm or for the economy at-large. If a firm average is used, contract and temporary workers should be included in the average for the client firm. If the national average is used, the amount paid into FICA by the firm should be adjusted so that the total cost to the firm of the employer contribution is the same percentage of payroll as the current obligation.
Employer contributions based on average income would be a change in the way most ESOPs distribute shares to their employees, as the common method is as a percentage of income. In my experience as an ESOP employee-owner, the current practice is demoralizing to lower salaried junior employees, causing retention problems. The effect of longevity should be enough to reward higher salaried employees and to provide them with enough control over the operation of the firm. Adding a differential based on wage is a perceived double hit on equity as seen by these employees. Additionally, the awarding of an equal number of shares each pay period to each employee prevents the kind of incentives found at Enron, especially if the award of additional shares are limited to rewarding results rather than salary level and are distributed to an entire work team. This development will also benefit workers, especially the rank and file.
Investing private account funds in ESOPs provides for a more direct avenue of investment in plant and equipment, rather than encouraging stock speculation and subsidizing mutual fund managers. It gives the employees of the firm an ownership incentive and long-term protection against layoffs, provided that employees also have the appropriate voice in the leadership of the firm, through their elected union representatives where applicable.
Forging Ahead
Labor organizations should seriously consider the President's proposals if doing so means a debate on union representation on corporate and ESOP boards, a long held demand of organized labor. The enactment of such structure might also encourage Union pension funds to convert a portion of their assets from diversified ownership to ESOP participation in the firms at which their members are employed (which I will address in my next article).
The final question addressed here is the shortfall in the Social Security system and how it might be funded. The existence of both private accounts and the ESOP option makes a discussion of raising or abolishing the income cap on contributions more palatable, as such an increase will raise the average income which can be invested in the ESOP trust fund. Higher percentage contributions would also be more acceptable to both employees and employers, provided that a portion of these increases goes to the personal and ESOP retirement accounts.
For progressives, increasing the income cap is more palatable than subsidizing Social Security privatization using the general fund. The President's Commission has recommended in two of its plans that this shortfall be paid out from the General Fund and that benefits be cut by changing the way inflation is calculated (making retirees foot the bill). When the General Fund is tapped for this purpose, either income tax rates must be raised or debt increased. Increases in the debt draw money from the same demographic as income taxes or increased payroll taxes, though the wealthy would much rather lend their money and receive interest than to have it confiscated. If the wealthy must be taxed, most seem to prefer income taxes so that they can attempt to shelter some or all of the money.
No matter how you slice it, however, upper income individuals will fund the difference. Assuring that they do so in a way which does not mortgage our children?s future is one area where organized labor can be effective in exacting concessions, although more than any other provision, insisting on higher payroll taxes may be considered a poison pill. How the White House and the Republican leadership in Congress respond to such proposals will be key to judging how seriously they are pursuing the creation of Personal Retirement Accounts.
Part II in the February issue:
Look for Part Two of this series in the February LCG where Mr. Bindner will detail how Taft-Hartley pension funds, or Personal Retirement Account funds controlled by labor, might be used to leverage expanded ownership and create the workplace of the future.
Monday, January 13, 2003
Social Security ESOP Questions
What provisions of law must be changed and/or what would the impact be on ESOP financing of having OASI contributions flow to ESOPs?
What is preferable, providing survivors insurance for current workers as part of ESOP or to continue this program as social insurance?
What provisions of law would be required to allow ESOPs to serve the function of a credit union to provide home, car, education and line of credit loans (allowing members to borrow against their stock and future incomes without cashing out) and to have the ESOP to receive the home mortgage deduction and student loan deduction directly instead of transferring this to the employee? (note that this approach could bring the Credit Unions into an ESOP privatization coalition).
Can ESOPs hold “diversified shares and assets” or merely be part of a larger 401(k) plan that does so? What provisions of law must be changed, if any, to allow this and retain S Corporation benefits? Might some of these diversified shares be held as public monopoly Customer Stock Ownership Plans (CSOPs) and community development Community Investment Corporations in geographic areas where the firm does business? (this diversified approach might win over Wall Street, which might be a big loser otherwise if ESOPs became the primary focus for OASI privatization).
OASI benefits are currently redistributional. Using the employer contribution to provide flexibility, how could ESOPs duplicate progressivity in making ESOP contributions in lieu of OASI contributions? Might an alternative be to have employee contributions tied to income while the employer contribution is distributed equally – regardless of wage and salary level?
(this approach might win over such organizations as the Center for Budgetary and Policy Priorities, especially if they agreed to run the numbers)
What is better, to have a different ESOP for each “faction” in a firm (labor, management, engineering) or to provide for factional voting and representation for and on the ESOP board? What, if any, provisions of law must be changed in each case? If allowable under current law, how might this be accomplished?
How would a Union convert its pension fund into a series of ESOPs for its members in particular firms? (note that the previous approaches might be useful in bring labor into the coalition)
One possible option to transition from the current Social Security system to an ESOP based system is to allow employers and employees to cease contributing to FICA if past employees and retirees are or have previously been fully capitalized in the firm’s ESOP as if participating under the new provisions their entire tenure with the firm. At what point would it be in the interest of ESOPs to pursue this option and what federal financial incentives might hasten this (i.e., federal securities to capitalize the social security trust fund surplus – or some level over and above a fair distribution of this trust fund)?
Would raising or eliminating the income cap subject to OASI taxation actually help ESOPs by providing more funds for investment under the above scenario? Would such an increase speed the transition?
Regarding individual contributions to OASI, how would percentage contribution to a 401(k) or ESOP and percentage contribution to FICA be varied by income to both maintain progressivity and finance transition costs? Might ESOPs make these transitional contributions to OASI for employees and then have the employee reimburse the ESOP over time?
What is preferable, providing survivors insurance for current workers as part of ESOP or to continue this program as social insurance?
What provisions of law would be required to allow ESOPs to serve the function of a credit union to provide home, car, education and line of credit loans (allowing members to borrow against their stock and future incomes without cashing out) and to have the ESOP to receive the home mortgage deduction and student loan deduction directly instead of transferring this to the employee? (note that this approach could bring the Credit Unions into an ESOP privatization coalition).
Can ESOPs hold “diversified shares and assets” or merely be part of a larger 401(k) plan that does so? What provisions of law must be changed, if any, to allow this and retain S Corporation benefits? Might some of these diversified shares be held as public monopoly Customer Stock Ownership Plans (CSOPs) and community development Community Investment Corporations in geographic areas where the firm does business? (this diversified approach might win over Wall Street, which might be a big loser otherwise if ESOPs became the primary focus for OASI privatization).
OASI benefits are currently redistributional. Using the employer contribution to provide flexibility, how could ESOPs duplicate progressivity in making ESOP contributions in lieu of OASI contributions? Might an alternative be to have employee contributions tied to income while the employer contribution is distributed equally – regardless of wage and salary level?
(this approach might win over such organizations as the Center for Budgetary and Policy Priorities, especially if they agreed to run the numbers)
What is better, to have a different ESOP for each “faction” in a firm (labor, management, engineering) or to provide for factional voting and representation for and on the ESOP board? What, if any, provisions of law must be changed in each case? If allowable under current law, how might this be accomplished?
How would a Union convert its pension fund into a series of ESOPs for its members in particular firms? (note that the previous approaches might be useful in bring labor into the coalition)
One possible option to transition from the current Social Security system to an ESOP based system is to allow employers and employees to cease contributing to FICA if past employees and retirees are or have previously been fully capitalized in the firm’s ESOP as if participating under the new provisions their entire tenure with the firm. At what point would it be in the interest of ESOPs to pursue this option and what federal financial incentives might hasten this (i.e., federal securities to capitalize the social security trust fund surplus – or some level over and above a fair distribution of this trust fund)?
Would raising or eliminating the income cap subject to OASI taxation actually help ESOPs by providing more funds for investment under the above scenario? Would such an increase speed the transition?
Regarding individual contributions to OASI, how would percentage contribution to a 401(k) or ESOP and percentage contribution to FICA be varied by income to both maintain progressivity and finance transition costs? Might ESOPs make these transitional contributions to OASI for employees and then have the employee reimburse the ESOP over time?
Thursday, January 2, 2003
The Real Social Security Crisis
Perhaps the most contentious issue in domestic politics is the reform of Social Security. Proponents of change point to forecasts that point to the need for benefit cuts or tax increases to insure program solvency. The Congressional Budget Office points to the increasing share that Social Security, Medicare and Medicaid require in the federal budget of the future. The real driver behind these trends is the aging of the Baby Boom generation. As this generation ages, it demands to use the Social Security benefits it worked for and the medical care to which it is entitled.
Proposed Solutions
Both parties offer various solutions. The President and the “free market” libertarians propose diverting a portion of Social Security payroll taxes to private investment in the stock market in the hopes that returns from the market will, in the long run, outpace the return on government bonds. Of course, this comparison is false, since the payroll tax is related to the performance of the economy as a whole rather than the performance of government financial instruments.
Defenders of Social Security point out that the real objection that the right has to the program is not its return, but its very nature as a redistributive social insurance program. In other words, they allege that the real goal of diverting private assets is to destroy the system, not to save it. Their defense has some merit. In response, progressives propose not only leaving Social Security intact, but increasing the income cap on contributions to capture as much of a share of national income as has been captured in the past (90%). Growing income inequality has left more wealth in far fewer hands, so to capture the same share of income, raising the cap is essential. Defenders of the program also offer their own way to increase national savings, especially among poorer citizens. Instead of redirecting payroll taxes, tax credits to establish savings plans are created so that individuals are forced, or at least encouraged, to save and invest in some form of index fund. In this way, even if no new taxes are raised, everyone has a nest egg to buffet them against the possibility of benefit cuts to Social Security. Investment of Social Security Trust Fund assets in the stock market was also explored for a time, although the tech bust and the return to deficit spending have put that talk to rest.
Similar Impacts
All told, there is not much difference between the solutions offered by the left and the right. The left proposes transfers form general revenues to increase savings while the President’s plan calls for a transfer of general revenues to the Social Security system for the creation of Personal Retirement Accounts (along with a cut in the payroll tax). The effect of this is not unlike raising the income cap on payroll taxes, because higher income individuals pay the lion’s share of the personal income taxes that finance the general fund. The President’s efforts at tax reform not withstanding, his economic advisors must know that cutting taxes further while increasing transfers to the general fund eventually lead a future Democratic president to increase taxes to make up the shortfall. It is simply a question of pay me now versus pay me later.
Likewise, the investment strategies are largely similar, especially if the White House submits Model Three proposed by the President’s Commission to Strengthen Social Security. This model includes an additional savings component, like the plan offered by the left. More importantly, both rely on the use of index funds, with proxy voting decisions left in the hands of fund manager who’s interest is the maximization of profit rather than the strength of the economy or the economic health of the workforce (whether domestic or foreign). Most importantly, both rely on either the performance of the stock market or the tax system to bolster the retirement savings of the Baby Boom. In another essay, I propose a better way to invest public retirement, union pension and supplemental savings funds by including employee ownership I address the difficulty of relying on enhanced savings for the retirement of the Baby Boomers here.
There is little difference between increasing taxes and increasing investment to provide for the increased needs of the Baby Boom generation. Relying on higher taxes by increasing the payroll tax broadly contracts the economy, as children work harder to pay for their parents and grandparents. Simply raising taxes on the wealthy, while attractive because it increases consumption and thus the economy, is likely not adequate to fully meet the enhanced retirement needs of the Baby Boom. Further, any solution that requires raising taxes now for future investment runs into the same problem as increased investment in the market: you can’t eat government bonds or stock certificates.
In the case of increasing stock investment, eventually the securities invested must either produce increased dividends or be sold in such a way that depresses the stock price. In this case, the worker of the future either works harder or has an increasing share of the wealth his or her labor produces go to the redemption of capital, leading to a lower wage. In the end, it matters little to the workers whether they pay higher taxes on a higher wage or lower taxes on a lower wage. The net wage they receive is about the same, and absent productivity gains, this wage is stagnant or decreasing. Of course, if productivity gains are assumed, then there really is no crisis, as the projected output of society meets the demand for goods and services. Let us assume for the moment, that productivity gains or the lack thereof are already part of the model that predicts the Social Security crisis, so productivity is not our answer.
Globalization Effects
Investing in the market does have one advantage that increasing taxes does not, the ability to rely on foreign labor without actually importing it. Globalization, where American firms exploit foreign workers on behalf of consumers, provides enough to the economy in the short run. In the long run, however, overseas workers begin to behave like their American counterparts. They gain a higher standard of living through work, demand more consumer goods and more social services and have smaller families. They eventually refuse to subsidize the American economy and then mimic it.
Addressing the Real Issue
If neither productivity nor globalization is the answer, what is? Simply put, the answer is a larger economy with more workers and more babies. The heart of the demographic crisis in Social Security is that the Baby Boom did not produce a large enough Echo Boom, at least not large enough to fund its own retirement. There are a variety of reasons for this, from the rise of women in the work force to the increasing cost of having a child with economic adolescence stretching into the 20s, to decisions to have less children or to forgo marriage and family entirely. None of this is news to anyone. What is news is that the solution to the Social Security crisis lies not in the financing of retirement but in financing childrearing and education.
The real solution to the demographic crisis lies in altering the tax code to increase the income of families through broadening the earned income tax credit for all families, regardless of income (either high or low) and making it creditable at withholding, essentially enacting a negative income tax. This is paid in one two ways. The first is to do so under personal income taxes. Doing so increases the direct role of government in redistributing wages, and is likely politically unacceptable for that reason. The second way is to end personal income taxation of all but the wealthy and shift the tax burden for wages to the employer under the Business Income Tax. Under this option, the same redistribution occurs, but it is less transparent to the average worker. This option leads to a shifting in how wages and taxes are distributed within companies, but does not change the tax burden for the average company, as the average employer has an average number of children supported by its output.
Finally, to make child rearing more attractive, the economic age of majority must be rolled back to the mid to late teens. At age sixteen or seventeen young people go into either vocational training or follow an academic track, with the key feature being that they are paid to do so and either the government, their school or their future employers bear the costs rather than their parents. Removing this long-term burden takes much of the fear out of bringing a child into the world, leading people to have more children and solving the demographic Social Security crisis once and for all.
The solutions I propose also offer a much better way to decrease abortion services than anything now offered by the pro-life/anti-choice forces. Providing for a higher income for every child and removing the fear of college costs takes away any economic incentive to have an abortion for already established families. Providing for the education and support of young adults also remove the negative impacts of early childbearing, again decreasing or eliminating the incentive for abortion. These impacts are important, because they add members to the coalition to pass these solutions that are not otherwise there. Conservatives think twice about rejecting these reforms if they are also a pro-life vote. Progressives are also hard pressed to stand in the way of proposals to enact a guaranteed income and a wage structure that empowers youth. Solving the demographic crisis takes the vitriol out of the funding crisis, making some form of compromise involving individual stock ownership and increasing taxes to fund the transition possible. Before we continue with Social Security, however, let us further discuss basic structural change to the tax code needed to end the demographic crisis.
Proposed Solutions
Both parties offer various solutions. The President and the “free market” libertarians propose diverting a portion of Social Security payroll taxes to private investment in the stock market in the hopes that returns from the market will, in the long run, outpace the return on government bonds. Of course, this comparison is false, since the payroll tax is related to the performance of the economy as a whole rather than the performance of government financial instruments.
Defenders of Social Security point out that the real objection that the right has to the program is not its return, but its very nature as a redistributive social insurance program. In other words, they allege that the real goal of diverting private assets is to destroy the system, not to save it. Their defense has some merit. In response, progressives propose not only leaving Social Security intact, but increasing the income cap on contributions to capture as much of a share of national income as has been captured in the past (90%). Growing income inequality has left more wealth in far fewer hands, so to capture the same share of income, raising the cap is essential. Defenders of the program also offer their own way to increase national savings, especially among poorer citizens. Instead of redirecting payroll taxes, tax credits to establish savings plans are created so that individuals are forced, or at least encouraged, to save and invest in some form of index fund. In this way, even if no new taxes are raised, everyone has a nest egg to buffet them against the possibility of benefit cuts to Social Security. Investment of Social Security Trust Fund assets in the stock market was also explored for a time, although the tech bust and the return to deficit spending have put that talk to rest.
Similar Impacts
All told, there is not much difference between the solutions offered by the left and the right. The left proposes transfers form general revenues to increase savings while the President’s plan calls for a transfer of general revenues to the Social Security system for the creation of Personal Retirement Accounts (along with a cut in the payroll tax). The effect of this is not unlike raising the income cap on payroll taxes, because higher income individuals pay the lion’s share of the personal income taxes that finance the general fund. The President’s efforts at tax reform not withstanding, his economic advisors must know that cutting taxes further while increasing transfers to the general fund eventually lead a future Democratic president to increase taxes to make up the shortfall. It is simply a question of pay me now versus pay me later.
Likewise, the investment strategies are largely similar, especially if the White House submits Model Three proposed by the President’s Commission to Strengthen Social Security. This model includes an additional savings component, like the plan offered by the left. More importantly, both rely on the use of index funds, with proxy voting decisions left in the hands of fund manager who’s interest is the maximization of profit rather than the strength of the economy or the economic health of the workforce (whether domestic or foreign). Most importantly, both rely on either the performance of the stock market or the tax system to bolster the retirement savings of the Baby Boom. In another essay, I propose a better way to invest public retirement, union pension and supplemental savings funds by including employee ownership I address the difficulty of relying on enhanced savings for the retirement of the Baby Boomers here.
There is little difference between increasing taxes and increasing investment to provide for the increased needs of the Baby Boom generation. Relying on higher taxes by increasing the payroll tax broadly contracts the economy, as children work harder to pay for their parents and grandparents. Simply raising taxes on the wealthy, while attractive because it increases consumption and thus the economy, is likely not adequate to fully meet the enhanced retirement needs of the Baby Boom. Further, any solution that requires raising taxes now for future investment runs into the same problem as increased investment in the market: you can’t eat government bonds or stock certificates.
In the case of increasing stock investment, eventually the securities invested must either produce increased dividends or be sold in such a way that depresses the stock price. In this case, the worker of the future either works harder or has an increasing share of the wealth his or her labor produces go to the redemption of capital, leading to a lower wage. In the end, it matters little to the workers whether they pay higher taxes on a higher wage or lower taxes on a lower wage. The net wage they receive is about the same, and absent productivity gains, this wage is stagnant or decreasing. Of course, if productivity gains are assumed, then there really is no crisis, as the projected output of society meets the demand for goods and services. Let us assume for the moment, that productivity gains or the lack thereof are already part of the model that predicts the Social Security crisis, so productivity is not our answer.
Globalization Effects
Investing in the market does have one advantage that increasing taxes does not, the ability to rely on foreign labor without actually importing it. Globalization, where American firms exploit foreign workers on behalf of consumers, provides enough to the economy in the short run. In the long run, however, overseas workers begin to behave like their American counterparts. They gain a higher standard of living through work, demand more consumer goods and more social services and have smaller families. They eventually refuse to subsidize the American economy and then mimic it.
Addressing the Real Issue
If neither productivity nor globalization is the answer, what is? Simply put, the answer is a larger economy with more workers and more babies. The heart of the demographic crisis in Social Security is that the Baby Boom did not produce a large enough Echo Boom, at least not large enough to fund its own retirement. There are a variety of reasons for this, from the rise of women in the work force to the increasing cost of having a child with economic adolescence stretching into the 20s, to decisions to have less children or to forgo marriage and family entirely. None of this is news to anyone. What is news is that the solution to the Social Security crisis lies not in the financing of retirement but in financing childrearing and education.
The real solution to the demographic crisis lies in altering the tax code to increase the income of families through broadening the earned income tax credit for all families, regardless of income (either high or low) and making it creditable at withholding, essentially enacting a negative income tax. This is paid in one two ways. The first is to do so under personal income taxes. Doing so increases the direct role of government in redistributing wages, and is likely politically unacceptable for that reason. The second way is to end personal income taxation of all but the wealthy and shift the tax burden for wages to the employer under the Business Income Tax. Under this option, the same redistribution occurs, but it is less transparent to the average worker. This option leads to a shifting in how wages and taxes are distributed within companies, but does not change the tax burden for the average company, as the average employer has an average number of children supported by its output.
Finally, to make child rearing more attractive, the economic age of majority must be rolled back to the mid to late teens. At age sixteen or seventeen young people go into either vocational training or follow an academic track, with the key feature being that they are paid to do so and either the government, their school or their future employers bear the costs rather than their parents. Removing this long-term burden takes much of the fear out of bringing a child into the world, leading people to have more children and solving the demographic Social Security crisis once and for all.
The solutions I propose also offer a much better way to decrease abortion services than anything now offered by the pro-life/anti-choice forces. Providing for a higher income for every child and removing the fear of college costs takes away any economic incentive to have an abortion for already established families. Providing for the education and support of young adults also remove the negative impacts of early childbearing, again decreasing or eliminating the incentive for abortion. These impacts are important, because they add members to the coalition to pass these solutions that are not otherwise there. Conservatives think twice about rejecting these reforms if they are also a pro-life vote. Progressives are also hard pressed to stand in the way of proposals to enact a guaranteed income and a wage structure that empowers youth. Solving the demographic crisis takes the vitriol out of the funding crisis, making some form of compromise involving individual stock ownership and increasing taxes to fund the transition possible. Before we continue with Social Security, however, let us further discuss basic structural change to the tax code needed to end the demographic crisis.
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