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The Economic Security Act: A GI Bill for the American Worker

By Bill Schweke on 10/19/2010 @ 11:23 AM

Tags: Ideas in Development, Economic Development

By William Schweke

Most everybody knows that the cost of college tuition is increasing, while the payoffs for post-secondary credentials and degrees are still high.  Advocacy efforts to create and expand children’s savings accounts, grants and loans of all types, tax credits, scholarships, and stipends abound.  Many of these show definite promise, as a method of funding one’s children’s initial post-secondary education, both equitably and efficiently.  There is also a need for reconsidering how best to target the aid to help those that truly need the assistance, as well as decreasing the complexity of the applications process and forms for the average American.

Yet, where does the adult worker fit into this situation?  With a family, he is more strapped for cash.  Furthermore, the accelerated “churn” of job creation and loss, along with rapid technological change, mean greater financial insecurity and the need for periodic career shifts for the middle class and other labor market participants.  

Can she or he save enough rapidly to address these contingencies, while addressing the family’s other savings priorities, such as retirement or saving for a “rainy day”?  I am doubtful.  (This article, like all the ones on this blog, represent my opinion, not that of my organization.)¹ Obviously, the more upwardly mobile the family bread-winners are, it will be more possible.  As their incomes go up, they can live better and save more easily.²  

These are lots of “ifs” that can’t be counted on.  So, is there another option?

A Proposal to Ponder
A three-decade old proposal may hold part of the answers to these questions.

About 28 years ago Roger Vaughan, an economist and a friend designed an extremely clever rethink of the whole workforce development system in the United States.   Originally written during the early days of the Reagan Administration, his work took to task the President’s effort to revive the economy by using massive capital subsidies, while spending no fiscal attention to investing more wisely in people.  In fact, President Reagan intended to cut the federal expenditure on job training and education in real terms by 40 percent over three years.  (Today’s federal adult education and training programs—so called “Second Chance” programs—are a fraction of what they were).

Roger never regarded the existing human capital programs at the federal level as wonderful.  In fact, he thought that, although they were better than doing nothing, their effects were, in most cases, pretty minimal: the programs could produce a few more dollars in income, but hardly widespread lasting escapes from poverty.  If asked, Vaughan would probably say that today’s programs are better than ones managed long ago.  He argued in his original papers, testimony to Congress, a CFED paper, and other articles that the Comprehensive Employment and Training Act, given all the flaws in design and implementation, was good enough to give hope to reformers.

Vaughan’s Critique of the Workforce Development System
His critique was thorough and radical, and although the points that follow refer to the workforce system of the 1980s, they largely apply today.

• “The first lesson is that, by creating special training programs for the poor, we have created a two-tier system that perpetuates their exclusion from the mainstream of the economy.  Those provided with assistance are shunned by potential employers.  At the same time, millions of low income workers are denied any help at all because of inadequate funding and restrictive eligibility requirements.”
• Second, “federal programs have subsidized training institutions rather than individuals.”   The programs are not accountable for the quality of the training they provide, and do not respond to the shifting tides of the labor market.  In short, they do not empower the consumer, the potential trainee.
• Oversight and regulations have stifled creativity and focused on process and outputs, not impact and outcomes.
• “Uncertainty over funding levels and guidelines preclude the long term planning and the evolution of effective programs.  Annual budgets have been held hostage to fluctuating Congressional objectives.”  Consequently, funds have been tardy and unpredictable.
• At the same time, “the nation is confronting a period of extraordinarily rapid economic change.”  There are demographic changes, technological change, new trade and foreign investment trends, wage stagnation and growing inequalities, out-sourcing and off-shoring on the rise, an increase in employment insecurity and so forth.
• Hence, the US worker “will need better basic skills just to get into the workforce and will need to invest time and money to acquire new skills in order to stay employed. “  The large paternalistic firm of yesterday is nearly extinct.
• Finally, he pointed to a series of private market-based incentive distortions, information gaps, and collection action failures.  These problems, which, along with unintended policy trade-offs (e.g., income maintenance, employment regulation, taxes, etc.) caused a capitalist economy like America’s to fail to self-correct market imperfections.  Indeed, employers on their own cannot invest in the proper training and basic skills education and remain solvent.

In response, Roger came up with a bold but plausible solution.  He called it the Job Development Authority.   I prefer naming it by drawing a parallel to two US-based and beloved social innovations –The Social Security Act and the GI Bill.

The Economic Security Act: Its Design and Workings
Here is how it would work.

First, it would get rid of all existing pots of federal training funds. (This may be a bit radical.  For example, I would set aside some funds that could be used by institutions for matching monies targeted at regional efforts and for sector and cluster strategies).  Assistance would be primarily focused on individuals, not training and educational institutions.

Funding should be secure and come from a dedicated revenue stream – a slight hike in payroll taxes (one percent of FUTA for the employer and one percent from the worker).  This would be akin to social security taxes.  (The formula is actually more complicated, but I won’t bore or confuse you with further detail.)  States could augment these funds if they wished, and the individual could supplement these funds with her own savings.  Vaughan estimated that this tax would generate a significant amount of workforce dollars, many more than currently spent.

The voucher “earnings” would have a progressive feature as compared to the tax.  (It is akin to Social Security’s wage replacement scheme.)  Each working individual would “earn” over time a voucher estimated to be worth between $5,000 and $10,000.   Those with lower incomes earn at a higher rate than the more affluent.  And as incomes hit a certain ceiling, the accounts would start generating “funds” at a progressively lower rate.  (One would need to sort out the marginal cost and benefit issues with this program and the tax code.)  UI eligible workers who were jobless would earn their learning account faster or could take a no-interest loan to be paid back by re-entering the workforce and paying back the credit.  An individual may not use another voucher supporting educational opportunity within five years of the last one, and the voucher would be capped as well.  Finally, the voucher redemption will only pay for 90 percent of the training and education; a ten percent co-pay would be required.

Approval of the training program would be required, but it could be delivered by any reputable public, nonprofit or for-profit organization.

This proposed workforce preparation and retraining system would provide the “full range of training and labor market services” currently delivered and would provide a single intake system for everyone (employers and employees) requiring such services.  (One-stops would still exist whose primary purpose is to assist labor market “entrepreneurs” by making capital and information more readily available.)

State and local governments would be free to modify the voucher by topping it up for “priority” occupations.  Likewise, there would be money available for planning and implementation grants for sector, industry, and cluster projects.   The majority of funds would be vied for by a variety of educational and training institutions.

The administrative structure would be much more streamlined.  The private sector would continue to be involved in an advisory role at the state and local area.  A clear division of responsibilities between federal, state and local governments would be made.

The federal role would be (1) set overall employment and training goals and performance standards; (2) administer programs aimed at Native Americans, refugees, and migrant farm workers; (3) collect, process, and distribute data to the states and national participants; (4) research and evaluate employment programs and practices; (5) monitor and audit state operations to see if goals were met; and (6) monitor waste, fraud and abuse.

The state level board would receive designated trust fund dollars to (1) send to local schools for secondary and post-secondary vocational education and for programs aimed at high school dropouts; (2) distribute to local one-stops for voucher redemption; (3) pay for state administered operations such as institutional accrediting for training programs; (4) monitor the performance of local offices; and (5) distribute information.

Local offices would be the key frontline offices charged with (1) distributing information on labor market and occupation trends; (2) delivering mandated services such as UI checks and handicapped and veterans programs; (3) providing placement services including screening and aptitude testing, counseling, and referral to support services; and (4) developing subsidized work programs with private and nonprofit communities.

In response to this reorientation of the system that makes it more customer- driven, community colleges, four-year universities, apprenticeship programs, technical and other proprietary schools would innovate in countless ways to attract that trainee voucher.

Benefits of this Approach
This proposal appears to still be ahead of its time. Despite the fact that implementing this approach would require a new tax and revenue stream, there are numerous benefits to enacting all or part of these system-wide workforce modifications including: 

• Finding a way to finance adult learning;
• Creating a non-stigmatizing system;
• Increasing the accountability of the whole system;
• Developing a reliable mechanism like social security to compliment the savings (IDAs, Children’s savings accounts);
• Finding an equitable approach to workforce development that does not require taking on more debt, or being forced to cobble together funding sources;
• Increasing the flexibility of funding in terms of use (books, tuition, living stipends, etc.);
• Sending a signal to all American workers that education and training matters;
• Motivating American workers to get some “skin in the game,” because of the co-payment features; and
• Structuring a much fairer social compact with the American worker.

 

¹ Based on very rough calculations I contend that the less affluent family, if it really spends within a frugal budget, saves, and takes advantage of every welfare state program that they are eligible for, can probably generate sufficient funds for paying for a good portion of their children’s post-secondary schooling, as well as set aside some retirement savings.  Dealing with the parents’ own long-term education and retraining needs will be much more difficult.

² Moreover, if the Pre-K through 12 educational system is more successful in the future, its pupils will start their schooling at a better place, graduate from high school, and exhibit more motivation, employability, resilience, and adaptability. This should equip them to not just work in the New Economy but to prosper in it.  Plus, it will enable them to make mid-course career or occupation changes more easily.  This is in stark contrast to today, where displaced workers face big hurdles in acquiring the hard and soft skills to enable them to be retrained.