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.
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?
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.
The Brookings Institution recently sponsored a Commission chaired by former Federal Reserve Chair Paul Volker. It looked at many aspects of career pay and benefits and asked for public comment. You do not have to ask me twice for such things. This essay contains the comments I provided to the Commission on the topics of management retention, the attracting of recent graduates, pay and benefits. I have slightly modified these remarks to delete material calling for the reform of the Presidential Management Intern Program, as such reforms have been announced by the Administration. I began my comments dealing with retention:
Management Tenure
Many leave the federal workforce because certain positions at the GS-14, GS-15 and Senior Executive Service (SES) levels because the incumbents continue to occupy these positions on an almost permanent basis, especially in the Defense agencies. While this is not always the case, the appearance can become reality and push younger professionals into the local government or private sectors.
Mid-level Professionals
Another aspect of career rigidity is the selection process for mid-level positions. Nothing is more frustrating than applying for a federal (or for that matter a private sector) position only to learn that the fix was already in and the results of the entire competition had been predetermined. In many cases, the individuals promoted into such positions are federal employees who deserve promotion non-competitively. Management should be able to advance such individuals without wasting the time and energy of applicants who must participate in a process that everyone knows is a sham.
Background Checks
An additional factor in pushing applicants away is the security process. Many individuals born after 1950 have experimented with illegal drugs. While the vast majority of these individuals have either entered recovery or simply stopped using without becoming addicted, most do not wish to face a clearance process that involves questioning on drug use in the distant past. There is also some question as to whether asking an individual if they have committed a crime as a condition of employment is a violation of the constitutional right against self-incrimination. While a federal job is not a right, due process rights such as self-incrimination should not be ignored. The Supreme Court has already upheld drug testing for certain sensitive positions. Offer potential and current employees the choice of taking a drug test rather than answering certain questions in detail on background questionnaires and interviews. Finally, the drug-testing program currently in force sends the wrong message, which is essentially one strike and you’re out. Offer employees who fail a drug test treatment, as in the private sector, rather than subjecting them to termination.
Executive Pay
The issue of pay compression identified by the Volker Commission is not a concern that I share. Higher-level positions offer rewards other than pay that are more along the lines of esteem and self-actualization. This is demonstrated by the tendency of high-grade workers to, in effect, decrease their hourly wage by putting in workweeks well in excess of 40 hours. While I agree that the problem of linkage to congressional pay is ill advised in the realm of judicial salaries, I urge the commission to consider with great care and respect the requirements of the 27th Amendment to the Constitution on congressional pay. Additionally, the problem of attracting political appointees is not low federal pay, but excessive private sector executive compensation. I ask that you not feed into the culture of executive greed.
Sick Leave
Other pay issues are of concern, however. The amount of sick leave that is accumulated by senior employees is staggering. Cap the accumulation of sick time at the higher end, and put a program of voluntary disability insurance in its place, with parental leave included as one of the benefits. This reform assures that those who truly need time off for medical reasons get it, while reducing the huge contingent liabilities now born by the federal government for sick time. Additionally, the best companies grant new employees a number of advance sick days upon hiring, sometimes up to a week’s entitlement. When the federal government introduced its sick leave policies originally it was ahead of its time, though it has not kept up with the times. These simple changes bring it up to date.
Annual Leave
Annual leave policies are also in need of reform. Many employees face the annual headache of trying to use their expiring annual leave. Many federal agencies are almost empty the last few weeks of the year, with junior employees forced to “baby sit their computers” for those weeks because they do not have the leave built up to take the time off. Many large firms simply close their doors between Christmas and New Years. This is a good step for the non-emergency and non-postal agencies of the federal government, with a matching reduction in the accumulation of annual leave at all levels. This allows the closure of these agencies, which saves energy costs. Even for junior employees, the annual leave entitlement is quite generous, at 13 days a year. In industry, the standard annual vacation time is 10 days. Employees with between 3 and 15 years receive 19.5 days a year, while senior employees receive 26 days. In industry, the vacation entitlement for these cohorts is usually 15 days for mid-level employees and at the most 20 days for the senior levels. A reduction of vacation to industry levels eases the public misperception that federal workers are over-paid. Reducing this misperception increases the likelihood that any general federal pay increase will pass.
Federal Holidays
Another action to change public perceptions is the reduction of the number of federal holidays, or at least their reorganization. Veterans Day was originally Armistice Day, honoring World War One Vets, who are now almost all deceased. Perhaps it is time to abandon this holiday and replace it with the Friday after Thanksgiving Day, which is a day off in much of industry and all of academia. Finally, Columbus Day has become quite politically incorrect, since it commemorates an action that led to the biological genocide of most Native Americans. In light of this, it needs to be abolished.
A Shorter Workday
Determining whether the pay of civil servants is adequate is difficult. Hourly estimates are misleading, because in much of the white-collar world the workday is no longer 8 hours. This is another area where the federal government started off as the most progressive employer and now is no longer. Many white-collar employees now work 7.5-hour days. Lowering the federal day to this level while holding annual salaries constant makes hourly wages higher. This action, as well as the introduction of an employee holiday the week after Christmas, also greatly impact federal contract employees, who are required to work the same 8 hour day, although most contractors, except those who are on-site at federal agencies, already close their doors for this week. As someone who is frequently employed as an on-site contractor, I strongly urge the Commission (and all of you) to consider them carefully.
Introduction
In September 2003, the fee for H-1B visa applicants authorized by the American Competitiveness in the Twenty-first Century Act of 2000 expired. As of January 2004, funding for new projects was withdrawn. Any remaining funds must either be expended on existing grants or reprogrammed by the authorizing committee. Advances in telecommunication have allowed Indian programmers and telecommunications workers to perform their duties in India rather than having to obtain an H-1B visa. These advances, as well as the sagging economy, make further action in this area outside of comprehensive immigration reform unlikely, although the data on visa program participation point to how this reform may take place. Additionally, while the H-1B Technical Skills Training Grant program did not produce the results hoped for, it does offer some valuable lessons for the future of workforce development and education.
Visa Program Reform
The 2002 Yearbook of Immigration Statistics from the Bureau of Citizenship and Immigration Services includes a table of H-1B Beneficiaries by Occupation and Region and Country of Birth for Fiscal Year 2002. The summary analysis shows a dramatic drop off in Indian petitions from one-half to one-third. Two thirds of the most recent reported petitions for Indian programmers were for renewals. Even then, the vast majority of computer programmer petitions are Indian. However, the number of computer programmers as a whole has declined by almost two-thirds. Only about half of these have graduate degrees, while the vast majority of Chinese applicants have graduate educations, most likely obtained here.
Unpublished information from FY 2000 obtained from what is now the Bureau of Citizenship and Immigration Services (which is detailed in Appendix A) included a breakout of whether the applicant resided in the U.S. at application. Analyses of these data show three major populations using the H-1B visa:
a. Indian computer programmers, engineers and administrative professionals with Bachelor of Science degrees earned in India,
b. individuals from many nations who were already in the United States, most likely pursuing graduate degrees, and
c. traditional H-1B applicants who did not study in the United States who are employed in a variety of professions.
These populations are profoundly different. In reforming this program, they should be treated differently. The Iowa Center for Fiscal Equity offers the following recommendations.
1. In order to provide funds for the retraining of American programmers, a separate vise category should be established for programmers and electrical engineers, with the length of stay increased to five years and the processing fee increased to $5,000 per applicant. There should be no limit on the number of applicants admitted under this provision. After three of these five years, visa holders should be free to change jobs without reapplication.
2. A separate category should also be created for applicants who hold graduate degrees earned in the United States from an accredited institution. There should be no fee for this group and there should be no limitation on the number of individuals granted this visa. Expedited procedures should be created for processing these applications, which should be made in tandem with an application for permanent residency, ending the temporary nature of this category.
3. There should be no fee for traditional H-1B applicants in the non-computer fields who did not study here, although the quota on this type of applicant should remain at 65,000.
Technical Skills Training
In September 2002, the General Accounting Office issued a report on High Skill Training. If found that only about 40 percent of occupations in the first three rounds of grants awarded by the Department of Labor program qualified at the H-1B level, according to consultations between the GAO and the former Immigration and Nationalization Service. In its latest solicitation, the Department has stressed training at an H-1B level as a requirement for funding. The GAO also found a lack of coordination between the Departments of Labor and Commerce and the National Science Foundation on workforce issues.
In early 2003, the Department of Commerce examined the proportion of grants having to do with nursing. It found that more than a third of H-1B grants awarded up to that time were for nursing, which is not an H-1B occupation because registered nurses are admitted under a special waiver under the permanent residency program. The Department of Labor no longer awards grants in this area.
The collapse of the technology bubble and the attacks of September 11th, 2001 have changed the market for high tech workers. At present, the demand for technology workers in the defense industry has strengthened, while the demand for e-business workers has dried up. Most high-tech defense jobs require a security clearance and U.S. citizenship, rendering H-1B visa holders ineligible and casting doubt on the appropriateness of using H-1B training funds to train U.S. workers in this area, although the Department of Defense and the defense industry must clearly be involved in the high-tech training solution.
With all of its flaws, the H-1B training program offers great promise in revolutionizing both workforce development and the funding of higher education.
Grant recipients form partnerships between area businesses, educational institutions and the workforce development system to work in a coordinated fashion to meet workforce development needs. Some grant recipients the Center has been in contact with consider this collaboration to be the high point of the program, especially within the business community. Some grant recipients had already been awarded Department of Labor grants for partnership development and community audit, enabling them to more easily meet the informational requirements of the grant application process.
The H-1B training approach also offers an antidote to the ever-increasing cost of higher education. Department of Education surveys of these costs have shown that grant and scholarship aid have kept up with the cost of tuition at all levels of undergraduate education, but that in order to afford room and board costs students are increasingly forced to depend on educational debt.
At the Iowa Center for Fiscal Equity, we believe that this trend may have the effect of discouraging economically and socially disadvantaged students from pursuing undergraduate or vocational education, particularly in the African American and Latino communities who often have less access to and experience with banking and credit services.
Early evaluations of the early H-1B grantees uncovered promising practices that may evolve with time into a long-term solution to the problems of unequal access to education funding and the rising cost of higher education. At one site, students were hired at the beginning of their training, thus avoiding the problems of placement at the end of the program and providing for the payment of living expenses while in training. At another program, students were required to either pay a portion of the initial cost or take out a student loan for these costs. At the completion of training, the employer would reimburse the employee or assume the responsibility for paying off the loan. Finally, the general approach to contracting for education services has led to lower tuition costs, as consortia of businesses can often obtain a lower tuition rate than an individual student.
Taking all of these findings into account, we offer the following recommendations for taking technical skills training to the next level:
1. Establish an inter-agency consortium on technical skills training and education at the sub-cabinet level with all concerned agencies, including the Departments of Commerce, Defense, Education, Health and Human Services, Homeland Security, Housing and Urban Development and Labor and the National Science Foundation.
2. The Department of Labor remains the natural home for technical skills training programs, due to the strategic involvement of the workforce investment system, including the one-stop centers, which provide the lynch pin for the involvement of local business communities and for all other federal programs at the local level.
3. Funding for a wider-ranging program should come from both the H-1B application fee described above and from the various partner agencies, as suggested below:
a) A multi-stage application process should be devised. The Departments of Housing and Urban Development and Labor should provide funds for community audits, consortium building and the linkage of economic and workforce development planning activities. Based on the findings of these studies, consortia of businesses or unions, local workforce development boards, and educational institutions would apply for training funds from the relevant partner agencies. The Department of Homeland Security will provide up to date information on H-1B visa holders.
b) The Department of Defense would fund training for the defense industry.
c) The Department of Commerce would fund technology training in the non-defense sector, using a portion of H-1B application fees.
d) The Department of Health and Human Services would fund nursing education, possibly drawing on a fee to be charged to employers who sponsor nurses for permanent residency.
e) The Department of Education would provide undergraduate and vocational training funds under current programs. Unlike the current program, the extent to which these funds will be used will be laid out in the grant application, as would the use of any H-1B scholarship funds for disadvantaged students provided by the National Science Foundation.
f) The Department of Labor would review every funding proposal concurrently for the involvement of the workforce development system and for reporting requirements, which would remain with the Department.
4. Individuals would access these training funds through their local workforce development agencies (one stop centers). Funding for both vocational training and undergraduate education would come from a variety of sources.
a) One half to one third of the cost of tuition would be funded through grant funds.
b) Ideally, to begin training the individual would be matched with a sponsoring employer, who would pay the individual’s living expenses and may pay a third of the tuition expense. Practical work experience with the sponsoring firm should be a component of the educational or training program.
c) Living expenses should be supplemented with public funds for economically disadvantaged individuals with families.
d) Qualified individuals would also receive tuition assistance from Department of Education and National Science Foundation programs, as well as state programs.
e) The individual would obtain a student loan through the Department of Education for the remaining tuition cost, but not less than one-quarter of the cost of tuition. At the end of the training program, the individual would be employed by the funding employer for a period of one to two years for every academic year of training or education provided, depending upon the extent and cost involved. During this period of employment, the employer would reimburse the Department of Education on behalf of the trainee. If the trainee is terminated from the position or resigns, he or she will be responsible for the unpaid loan balance.
Appendix A
An Analysis of H-1B Visa Holders
The data for this analysis were provided by what is now the Bureau of Citizenship and Immigration Services in the Department of Homeland Security. These data go beyond what was published in the usual reports at the time it was obtained in November of 2002 for Fiscal Year 2000. Data were obtained which compare petitions approved by the Country of Birth, Major Occupational Group and whether the applicant resided in the United States when the petition was submitted. This last variable provides an insight into whether the individual received his or her education in the United States or overseas. This analysis was undertaken in order to determine whether the H-1B population was homogeneous in terms of their educational experience, especially among applicants from India in the computer programming and engineering fields. Please see the table at the end of this appendix for further information.
It is a well-known fact that the largest groups of H-1B applicants are of Indian origin. What is less well-known is that in the computer field Indians make up two-thirds of the total and four-fifths of those who come from outside of the United States. Of all Indian computer programmers, almost 84% were not residing in the United States prior to their application. Of Indian engineers, 54% were not residing in the United States, while almost 46% were and were presumably pursuing an education in this country. Almost 80% of Indian applicants pursuing a career in education at the university level were already here. More than 58% of Indians in remaining occupational groups were also already in the United States when application was made, which is more along the line of the average applicant. The inescapable conclusion is that Indian computer programmers and engineers are different. Interestingly enough, research on H-1B using companies has shown that two-thirds of the firms in the computer field have South Asian last names. This indicates, although does not prove, that the high demand for Indian H-1Bs may have as much to do with alumni networking as the quality of the Indian system. It may be that threats to move operations in this industry offshore absent an increase in the visa limit or because of an excessive fee are quite hollow. Separating this category of employment into a new visa category with an increased fee will provide much needed visibility to whether this is the case.
Chinese applicants form the next most numerous group. Of these, almost 83% were already in the United States, presumably pursuing graduate and undergraduate education. If one looks at previously published data on educational level and whether the applicant was already in the United States, one can easily conclude that most of those who were here already were pursuing graduate education, while most of those who were not resident hold only a Bachelors degree. This lends support for a separate category for advanced degree holders who obtained their educations in the United States.
The next largest cohort is from Canada. However, the number of Canadian H-1B applicants is dwarfed by the number of Canadians admitted under the North American Free Trade Agreement.
The final cohort to be addressed here are applicants from the United Kingdom. Like the Indians, the vast majority (almost 70%) was not in the United States at the time of application. More than 80% of computer programmers and almost 80% of engineers applied outside of the United States. More than 60% of education occupation applicants were in the United States at application, indicating that they were likely here pursuing graduate education. Unlike the Indians, however, almost 70% of applicants for all other occupations applied from outside the United States, indicating that they are among the true H-1Bs who were educated and credentialed in their home country and are coming to the United States on a truly temporary basis. It is also worth noting that Indians, Canadians and subjects of the United Kingdom are all fluent English speakers and therefore more attractive to employers without additional education, while Chinese students and applicants from most other nations are not typically as fluent and therefore not as employable without a stint at an American graduate school.
Finally, for the remainder of the occupations, no one country is dominant, although for the remainder of the nations, roughly one-third are in the computer programming area.
