Is There a Fourth Way?

While I think that Third Way’s heart is in the right place in its “Social Contract for the Digital Age”:

To help people with the massive disruption happening today, we need a modern economic agenda that boldly redefines government’s role in expanding the opportunity to earn. The way to do that is through a new social contract for workers that would: 1) reimagine investment in good-paying jobs; 2) reinvent postsecondary education and skills; and 3) redesign the pay and benefits of work.

I have severe concerns about the position of its collective head. Consider this bullet point:

11. Universal Private retirement
Will guarantee that every worker has both Social Security and a private, employer-fed retirement account.

Today, nearly every worker in America has Social Security, and a lucky handful have either a traditional pension or private savings sufficient to live a comfortable retirement. But the traditional pension is fast becoming an artifact, and while many employers offer 401(k)s, many in the middle and working classes are at risk of saving too little for a comfortable retirement.

We have a minimum wage; we should have a minimum employer pension contribution for every job. Under this proposal, every job that doesn’t already have a retirement plan in which the employer contributes would now have a Universal Private (UP) retirement account. This would be completely separate from Social Security and would not affect the earned benefit program in any way. Resembling the federal Thrift Savings Plan, UP would be a simple, portable, individually owned account toward which employers would chip in at least 50 cents per hour worked. UP funds would be invested in a low-fee lifecycle fund with the option for enrollees to choose different investments. Workers would be encouraged to contribute their own money but could choose not to.

Upon retirement, the default payout would be in the form of a guaranteed monthly check for life to supplement a worker’s Social Security benefits. To offset the cost of the employer’s contribution in the early years, businesses would be eligible for a tax credit covering a portion of those contributions for up to 20 workers. This tax credit would be entirely financed by ending tax breaks on retirement contributions for individuals who have already accumulated $4 million in their tax-preferred accounts.10

With the modest, yet consistent, commitment to retirement savings fostered by UP, workers and employers would create nest eggs worth well over half a million dollars for retiring middle-class couples. That’s enough to fully match what such workers would earn from Social Security, which would remain 100% unchanged under this proposal.11

With UP, a lifetime of work would mean working- and middle-class people would have the same opportunity to earn a share of global profits as the professional class enjoys and, in turn, real wealth and retirement security they can count on. They would have wealth to pass on to children or a spouse. The wealth gap between the top and the rest of America would shrink appreciably. And a lifetime of work would guarantee a comfortable retirement.

The effect of mandatory employer contributions would be to raise the cost of employment and, consequently, to discourage it. In the presence of temps, H1-Bs, L-1s, and an alphabet soup of ways to bring workers in the country that would provide a competitive advantage to foreign workers over Americans already here. Is that what we really need?

Rather than going point by point through their proposals let me summarize what I think their net effects would be. They would:

  • Raise the cost of higher education without increasing the number of jobs that really require higher education.
  • Provide substantial disincentives to employment, particularly employee American workers.
  • Create an enormous bureaucracy dedicated to small business without actually helping small businesses.

There’s an old wisecrack about the First Rule of Holes: if you find yourself in a hole, stop digging. We need to stop subsidizing rich people, big companies, and stop importing workers.

Nearly three-quarters of the home mortgage deduction goes to benefit individuals in the top quintile of income earners. That is merely one of the thousands of forms of welfare for the rich. Most of those remain unchanged by the recent tax reform. Nearly every serious policy maker will tell you that the home mortgage deduction should be abolished. That’s political poison. As a good first step limit the maximum amount of interest to the price of the median home. That would be closer to $200,000 than the present $1,000,000 or the $750,000 that kicks in this year.

The list of benefits given to big companies is so vast I hardly know where to start. Not only do they have tremendous political clout, they receive more direct benefits, hardly a coincidence. Two-thirds of all grants and allocated tax credits go to just 582 firms and take it from me those aren’t mom and pop shops.

Small banks didn’t cause the financial crisis of 2007-2008. Big ones did. Big companies are not our friends. A company that is big enough to be dangerous is too big to be allowed to exist.

The problem with work in the United States is two-fold. First, the large number of foreign workers makes the job market too loose. That keeps wages from rising (not to mention enabling employers to maintain abusive work environments). Second, the very large number of unskilled and semi-skilled workers, many foreign and many entering the country illegally, changes what are viable business models. We’re maximizing the number of minimum wage workers when we should be aspiring to increasing the number of jobs that actually require college educations. The fastest growing job categories are in hospitality and the very low end of health care and both of those depend heavily on an imported workforce.

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