Congress and the president are negotiating the fifth round of supposed stimulus at COVID-19.

Most of the money has been used for CYA programs transferring money to be able to say they are protecting people and the economy. Much of it has been poorly targeted. Instead of primarily focusing assistance to people with high risk factors, they have thrown money at everything and everyone. Hoping something will work. Stability has been achieved but at a tremendous cost.

As vaccines become available and more people return to work, there is great danger of even more wasteful spending. Following are a couple proposals to get the money where it is needed while protecting workers and taxpayers alike. By providing loans instead of grants to state and local governments and individuals.

First Key Point:  State and local governments should be allowed to borrow the funds needed to make up for lost tax revenues and respond to Covid-19 related needs. They may use funds for their own programs to aid workers and businesses. In exchange they will be required to have fully funded pension and other delayed compensation within ten years. This requirement will be applied to all US employers to better protect all US workers.

Second Key Point:  Establish a new program for unemployed workers to borrow from the federal government up to 50 percent of the value of their IRAs, 401ks, and other retirement accounts to cover living expenses. The wealthy can borrow against the value of their portfolios and avoid selling when markets are down. This program provides the same opportunity for the middle class.

State and Local Government Aid

State and local governments have suffered from reduced tax revenues due to mandatory shutdowns and voluntary reduced economic activity. Many are asking for a bailout from the federal government. But the American people cannot afford to keep handing out money. There needs to be strings attached so that the people who are aided by these funds are the people primarily responsible for paying it back. In the future, if the crisis had a disproportionate impact on a sector through no fault of their own, forgiveness can be extended by Congress.

Allow states and local governments to borrow from the federal government at the U.S. government cost of borrowing to pay for their loans with a ten-year period to pay the loan back. State and local governments have the most control over whether the economy is open or closed so they should be responsible for the costs also. If every state and community is in this together, there is no need to socialize the costs with federal grants. Everyone will bear their own costs as much as possible. This unites the payment of the costs with the spenders of the money. They can borrow what they need but will be responsible for repaying the debt. It permits state and local governments to tailor their responses to local needs, initiatives, and opportunities. While forcing state and local officials to be mindful of the costs of their decisions. This should be the rule for aid to businesses as well. Loans rather than grants.

As two people familiar with crises, Winston Churchill and Rahm Emanuel, have said, “Never let a good crisis go to waste.” There is an opportunity to press for a major reform of deferred compensation such as pension plans in exchange for aid to state and local governments. In exchange for loans to cover lost tax revenue and COVID-19 related costs, require all deferred compensation to be paid for in the time period when the work was performed. Eliminate the ability of elected officials, administrators, and unions from conspiring to make promises that are not paid for until well into the future.

It shouldn’t only be a loan condition applied to borrowers but applied universally. In case there is a later legal challenge to the conditionality, reinforce it by requiring the state or local government borrower to contractually agree to it and pass it into law at their level. This is a long overdue reform that should apply to all employers—government and private sector. An important reform to protect workers and taxpayers.

Require realistic projections of investment returns. Limited to the lesser of the inflation adjusted 50-year average of the S&P 500, the 50 year average or life of the plan, and the 50-year weighted average returns of the indexes and investment classes most closely resembling the plan’s investments. If actual returns exceed these limits, future contributions can be reduced. A savings for taxpayers or shareholders instead of an unfunded liability forced upon future generations.

Require budget limits on borrowers until the pension plan funding is caught up. Except for catchup payments, budget increases should be limited to the increase in population plus the rate of inflation of the jurisdiction. Prohibit a decrease in the pension portion of the budget from the highest inflation adjusted amount from the previous ten years.

Require that 10 percent of the funding gap be closed each year. Any fiscal year that ends without the required gap reduction should incur a permanent haircut to the pensions to close the gap. This will make future annual targets easier to achieve. If it results in fully funding the pensions early, the state or local government may increase pensions later. Regardless, at the end of ten years require an instant haircut to bring the plan into compliance. Hopefully this will encourage most people to implement a realistic plan.

The first step if a haircut is required is to recalculate the pension benefit at the inflation adjusted weighted average wages for the entirety of each worker’s covered employment instead of a subset of the employment period. In many contracts, benefits are based on a few of the best paid years. Pensions based on the entirety of their employment is the fairest way to set a baseline before a haircut. With pensions set relative to their whole career, not a few cherrypicked years. It protects less well-connected workers who were unable to take advantage of these quirks in the contract.

If further reductions are needed, pension reductions should be progressively greater for higher paid workers and for the people most responsible for misleading workers and taxpayers. Use the compensation established in the first step from the entirety of their time of employment for calculating the pension benefit in the second step.

• Elected officials, senior administrators, union officers:  4X percent reduction
• All others with compensation above the national average:  3X percent reduction
• All others with compensation between the national average and national median:  2X percent reduction
• Everyone with compensation below the national median:  X percent reduction

The haircuts will be greater for people with higher incomes and more authority on the job. Making the impact greater on the people who could have best influenced honest accounting in the past. Reducing the impact on the lower income workers.

Elected officials, administrators, and union officials may be part of other pension plans than rank-and-file workers or may be responsible for multiple pension funds. Their percentage reduction should be set equal to the largest percentage reduction of any of the funds they were responsible for.

Taxpayers are cheated when unrealistic pension promises are made to government employees. Everyone is forced to pay higher taxes while receiving fewer services as pension liabilities crowd out funding for current programs. Taxpayers, shareholders, and workers will benefit from a similar requirement for private sector pension plans. The country is better served by the stability provided by honest pension projections and fully paid pension plans.

Middle Class Recession Borrowing

When recessions hit and the stock markets drop, the wealthy can borrow against their portfolio of securities to cover living expenses and buy more stocks while they are a bargain. Meanwhile the middle class is often borrowing from their IRA or 401k to make mortgage and car payments while unemployed. Forced to sell when markets are down and losing out when the markets rebound.

Establish a new program to allow people to borrow from the federal government up to half of the value of their IRAs and other retirement accounts when they are unemployed. They will be able to pay their bills and keep their funds in their IRA to reap the benefits when the markets rise again. Using the retirement accounts as collateral. Charge the U.S. government cost of borrowing plus enough to cover administrative expenses of the government and the investment company. Operate the program through the investment companies that host the retirement accounts.

Like student loans, payments can be deferred until six months after leaving the Unemploymnt Compensation program. To compel timely repayment, the borrower's interest rate will begin increasing two years after leaving the Unemployment Compensation program. The original rate will be increased by one percent annually for ten years. Thereafter adjusting annually to a rate equal to the U.S. government cost of borrowing plus the administrative fee plus ten percent.

Although the stock market is at peak levels, this could change at any time. It should be expected that workers will borrow from their retirement accounts during bull markets. While having this program available when markets are down. Allowing workers to realize the gains when the markets rebound. Instead of losing out because their money had to be pulled out to make mortgage or vehicle payments or buy food.

Having this program in place will bring several other benefits. It will encourage more people to fund their retirement accounts. Lenders can justify lower interest rates for borrowers who maintain retirement accounts because of the lower risk of default. Lowering borrowing costs for workers. Along with being a financial market stabilizer that is a safety net for borrowers and lenders alike. While also improving the financial position of workers when they retire. Providing a cost-free targeted stimulus not only during a recession but throughout a worker’s life.

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