Modern Families; Outdated Laws
June 21, 2007
Testimony for Submission to the
House Education & Labor Subcommittee on
Balancing Work and Family: What Policies Best Support America's Families
Hearing held on June 21, 2007.
Madam Chairwoman and members of the Subcommittee, please accept my comments for the record regarding the June 21, 2007, hearing regarding policies that will best support America's Families.
The most significant economic and social change in the past half-century has been the movement of women into the labor market. Since the 1950s, the labor participation rate of women ages 25 to 55 years has increased more than 75 percent. Today, more than 60 percent of mothers with children under the age of six are working. Families with both spouses in the labor market now constitute almost two-thirds of all married couples. Yet the tax law, pension law, social insurance policies and laws governing employee benefits assume women never left the home.
As such, the most important problems faced by middle-income working families today are not problems that arise from the nature of our economic system. Instead they are problems caused by outdated public policies. The basic structure of tax law, labor law, employee benefits law and a host of other institutions was formulated 50 or 60 years ago by policymakers who made assumptions about how life would be lived. From top to bottom, key public policies were based on the assumption that:
- Workers would work for the same employer throughout their work lives.
- Men and women would marry and stay married; and throughout their working years the husband would be a full-time worker and the wife would be a full-time homemaker.
Clearly, these assumptions no longer describe the world in which we live. Accordingly, institutions designed for the 20th century are unworkable and inadequate for the 21st century.
Adjusting to a Mobile Labor Market
One of the remarkable changes in the workforce over the past several decades is the rise in labor force mobility. Today, workers have held an average of 10.5 different jobs by the time they reach age 40. Traditional employee pension and health benefits are ill-suited for this environment. For example, opportunities to save for retirement are very dependent on where people work - and whether they work.
Retirement Benefits. Since World War II, the dominant form of retirement plan provided by employers has been the defined benefit pension. Employees acquire pension benefits based on their wages and years of service to the company. These plans work well for people who stay with the same employer, but they do not work well for employees who switch jobs. The reason: Under typical benefit formulas, workers sacrifice substantial benefits if they switch employers frequently throughout their career, even though they remain fully employed for their entire work lives and fully vested in every plan they enroll in.
Unlike defined benefit plans, defined contribution plans such as 401(k)s and 403(b)s promise no specific benefit at retirement. The employee has ownership rights over the assets in a specific account and is entitled to the full accumulation. Unlike defined benefit pensions, these accounts are portable: They follow the worker from job to job.
There are a number of ways to make 401(k) plans work better. These reforms - initially developed and proposed by the National Center for Policy Analysis and the Brookings Institution and passed by Congress in 2006 - include automatic enrollment of new employees in 401(k) plans, automatic escalation of contributions and diversified portfolios.
Workers who do not have access to a 401(k) plan may make contributions to an Individual Retirement Account (IRA). However, the contribution limits are lower and there are also income limits. Participants in an employer-sponsored 401(k) plan can contribute up to $15,000, while nonparticipants can contribute only $4,000 ($5,000 if age 50 or older) to a tax-advantaged IRA (both Roth and traditional IRAs).
Health Insurance. Tax relief for the purchase of health insurance also depends on where we work and whether we work. The federal government subsidizes employer-provided health insurance through the tax system. The employees avoid federal, state and local income taxes as well as payroll taxes. In some places, the government is effectively paying half the cost of the insurance.
The tax law is far less generous to people who must purchase insurance on their own, however. For this reason, more than 90 percent of people who have private insurance get it though an employer. The downside is that the health plan most of us have is not a plan that we chose; rather, it was selected by our employer. Even if we like our health plan, we could easily lose coverage because of the loss of a job, a change in employment or a decision by our employer.
Problem 1: Lack of Continuity of Insurance. Virtually all employer health insurance contracts last only 12 months. At the end of the year, the employer - in search of ways to reduce costs - may choose a different health plan or cease providing health insurance altogether.
Problem 2: Lack of Continuity of Care. Employees who switch jobs must also switch health plans. All too often that means changing doctors as well, since each health plan tends to have its own network.
Problem 3: Perverse Incentives for Employers and Employees. Some individuals have a family member (often a spouse or child) who has very high health care costs. When these workers compare job opportunities, they are primarily comparing health plans. To protect themselves from such potential hires, employers are increasingly altering their health plans to attract the healthy and avoid the sick.
Problem 4: Younger Spouses of Retirees on Medicare. When a husband retires and enrolls in Medicare, a younger wife may be left without coverage because underage spouses cannot enroll in Medicare. Until the wife qualifies for Medicare at age 65, the couple will have to purchase her insurance with after-tax dollars.
Problem 5: Federal Laws Designed to Encourage Portability Have Actually Outlawed It. Under the current system, employers cannot buy individually-owned insurance for their employees. Specifically, lawyers interpret the Health Insurance Portability and Accountability Act of 1996 (HIPAA) to say that the only employee health insurance employers can purchase with pretax dollars is group insurance.
Exception: Health Savings Accounts (HSAs). An interesting exception to these generalizations is the HSA. These accounts represent individual self-insurance and they are an alternative to third-party insurance. Unlike third-party insurance, HSAs are fully portable, traveling with the employee through the labor market. Moreover, they are a model of how the rest of the insurance arrangement may also become portable.
Making the Tax System Fairer. Health insurance and retirement savings choices have been distorted by a byzantine tax code that has long since lost its rational. In an ideal system, people would receive the same tax relief whether they save at home or at work, and whether they work or do not work.
Making Benefits Personal and Portable. Just because employers pay all or most of the premium does not mean health insurance must necessarily be employer-specific. As an alternative, why can't employees enroll in health plans that meet their needs, and then be allowed to stay in those plans as they travel from job to job? Portable health insurance promises a continuing relationship with an insurer and, therefore, a continuing relationship with doctors and health facilities. It also means that people who are in a health plan they like can stay in it, without worrying whether they will be forced out of the plan by an employer's decision or by a change in employment.
Pension benefits should also be personal and portable. While the creation of 401(k)s has been a liberating development in this respect, vesting periods are still too long. Although Congress has made progress on lowering vesting requirements, beyond a nominal period (to accommodate administrative costs) there should be no such thing as unvested, tax-advantaged 401(k) contributions. The principle should be: If there is a tax advantage, the benefit should belong to the worker.
Adjusting to Two-Earner Families. It is not just employee benefits that are outdated. Income taxes and payroll taxes favor families with a homemaker spouse over families with two working spouses. The same is true of other laws regulating the labor market.
Income and Payroll Taxes. Consider what happens when a married woman enters the labor market:
Even if she earns minimum wage, she is taxed at her husband's income tax rate; and even if her husband reaches the cap on Social Security taxes, she must still pay Social Security taxes on every dollar she earns up to the same maximum.
Since she is entitled to half of her husband's Social Security benefit (and gets 100 percent after his death) whether she works or not, odds are that she will get little if any benefit from the payroll taxes she pays.
Further, when all taxes and costs are considered (including the cost of child care and other services she was previously providing as a homemaker), a woman in a middle-income family can expect to keep only about 35 cents out of each dollar she earns.
Labor Market Rigidities. Our institutions were not only designed for the full-time worker with a stay-at-home spouse, employers and employees find it difficult to make any other arrangement.
Because of rigid tax laws and employee benefits laws, if both spouses work full time they will likely receive duplicate, unnecessary sets of benefits. The wife will be unable to acquire higher wages in return for forgoing health and pension benefits she acquires through her husband's employer.
In a free labor market, one would expect to find a wide variety of work arrangements. Not every two-earner couple will want to work 40 hour weeks. Some might opt for 25 to 30 hour weeks so they can spend more time with each other or raising children. But rigid tax and employee benefits laws make such arrangements largely impossible for people who need health insurance, pensions and other benefits.
Women raising children or caring for an ailing parent have other reasons to want flexibility in working hours. However, rigid labor laws may deny them the opportunity to attend a child's soccer game or take a parent to the doctor one week and make up the hours the following week.
Solutions. Many changes are needed to bring aging institutions into sync with the way people are living their lives in the 21st century. Here are a few suggestions:
All employee benefits should be personal and portable; they should be individually owned and travel with the worker as he or she moves from job to job.
There should be a level playing field under the tax law, so that people who save for retirement or purchase health insurance, long-term care insurance, day care, etc., receive just as much tax relief as people who obtain these benefits at work.
The tax system should not penalize two-earner couples; at a minimum, both spouses should be able to file completely separate tax returns.
The employee benefit system should be flexible, making it easier for dual-earner couples to obtain higher wages rather than unneeded, duplicate benefits, and for part-time workers to accept lower wages in return for more valuable health and retirement benefits.
Labor law should be flexible, making it easier for workers (especially parents with young children and caregivers for elderly parents) to choose alternatives to the traditional 40-hour work week.
Conclusion. As the Subcommittee deliberates modern workforce policies, I hope you will consider the significant changes to the labor market in the past half-century. Thank you for the opportunity to comment.