Socialism: price the savings insurance pool from real failure data and size it for a long recession

Co-Authored-By: Claude Opus 5.5 <[email protected]>
Claude-Session: https://claude.ai/code/session_01QWPs69B8nQZjtPEUXMKzZx

JoshHeaps.Net/Content/Socialism/open-problems.md

@@ -13,7 +13,7 @@ An honest list of what the model hasn't solved yet, most dangerous first.
 
 2. **The horizon problem.** *(Mostly answered.)* Members near retirement have little reason to vote for investments whose payoff arrives after they leave. The evidence from France and Italy finds no underinvestment where co-ops must keep a reserve, and [Investing for the Long Run](the-long-run.md) closes the main routes around this model's reserve: pay above the going rate, sales of assets, development spending, high pay that turns into losses, and worn-out equipment still in use. A warning light shows when a co-op stops replacing its equipment, and big bets get an independent opinion before members vote. Still open: nothing forces a co-op to maintain what it has, a bad bet that fails after its backers leave falls on the people who came after, and it's unsettled whether 30% is enough and whether the account rate is right. Letting members sell their places to incoming workers was rejected, because that is how the plywood co-ops ended up sold.
 
-3. **Members' savings sit inside their employer.** *(Partly answered.)* [Member capital accounts](capital-accounts.md) are capped at a year's pay, protected by a solvency test, and now insured by a pool the co-ops pay for ([Protecting Members' Savings](savings-guarantee.md)). It covers final wages, former members' payouts and a protected slice of current accounts. Still open: the pool has no government backing, so a wave of failures in one recession could outrun it. Nobody knows yet what the premiums really need to be. And its legal form, probably insurance under state law, isn't settled.
+3. **Members' savings sit inside their employer.** *(Partly answered.)* [Member capital accounts](capital-accounts.md) are capped at a year's pay, protected by a solvency test, and now insured by a pool the co-ops pay for ([Protecting Members' Savings](savings-guarantee.md)). It covers final wages, former members' payouts and a protected slice of current accounts. Premiums are now estimated from Europe's wage guarantee funds and US closure and default rates: at least 0.25% of payroll for final wages, and probably 2% to 3% a year of covered savings, which takes nearly all the interest on a protected slice. The reserve target is sized for a five-year wave of failures like 2008–2012, and cover for current members' savings waits until the pool has its own track record. Still open: the pool has no government backing, so a worse recession could outrun it; the estimates rest on rough data, not co-ops; the reserve takes about fifteen years to build; and it needs a federal charter to avoid fifty states' insurance laws.
 
 4. **Is the lock too rigid?** A co-op that should be sold (a better operator exists, the members want out) can only go to another co-op. If the co-op sector is small, that buyer pool is tiny, and viable firms may be liquidated instead of rescued. The federation as buyer of last resort is a partial answer. Critics on the right add a sharper version: a lock that outlasts a repaid loan by generations is a permanent restriction on selling property, bought with one loan, and it binds members who never agreed to it. The lock is now built to hold in layers, including an independent lock share and rules against selling the business piece by piece ([The Lock](the-lock.md#how-the-lock-is-made-to-hold)). Its biggest legal gap is bankruptcy: federal bankruptcy law generally overrides limits on selling a bankrupt company's property, so the lock only holds in bankruptcy if Congress amends that law. [When a Locked Co-op Goes Bankrupt](bankruptcy.md) drafts that amendment. It's modeled on how bankruptcy law already treats charities. Only co-ops can buy a failed co-op whole, its workers can keep it running and bid with the wages they're owed, and creditors who never chose to lend are paid the lock's cost from the federation fund. It still needs Congress, a later Congress can repeal it, and while the co-op sector is small, some viable businesses will be broken up for lack of a co-op buyer. Italy offers a softer model: a co-op there can convert into an ordinary company, but its accumulated reserves go to the co-op development fund, not to the members ([Has This Been Tried?](precedents.md#italys-co-op-funds-coopfond-and-the-marcora-law)). That would keep the part of the lock that stops members cashing out what earlier generations built, and drop the part that stops a firm from ever changing hands.
 

JoshHeaps.Net/Content/Socialism/savings-guarantee.md

@@ -40,30 +40,93 @@ Every locked co-op belongs to a **members' savings insurance pool**. It protects
 
 ## How it's paid for
 
-**By the co-ops, not taxpayers.** The pool has **no government backing**, for the same reason [the bank's](pilot-spec.md#the-decision-rule) debts don't. A public guarantee would be a hidden subsidy, and markets would come to assume it. That's a real difference from credit unions and banks, and it's why the pool has to be run more cautiously than they are.
+**By the co-ops, not taxpayers.** The pool has **no government backing**, for the same reason [the bank's](pilot-spec.md#the-decision-rule) debts don't. A public guarantee would be a hidden subsidy, and markets would come to assume it. That's a real difference from credit unions and banks, and it's why the pool has to be run more cautiously than they are. The charter also bars the bank from lending to the pool, buying its assets or paying its claims, so the bank can't become a backstop by the back door. No law can stop a future Congress from bailing the pool out. The best this model can do is keep the promises small enough, and the cut in a bad year plain enough, that a bailout isn't needed.
 
 - **A deposit to join.** Like a credit union, each co-op keeps a refundable deposit with the pool, worth 1% of what's covered.
-- **Yearly premiums, priced as if nothing will be recovered.** Members' accounts rank behind the co-op's lenders, so when a co-op fails, there's usually little or nothing left to recover. Premiums assume exactly that. They're set by an independent actuary from a published formula, and audited every year in both directions, like [the bank's rates](pilot-spec.md#what-market-rate-means).
-- **Priced on the co-op's structure, not its last bad quarter.** The premium depends on things like the size of the reserve and how much the co-op owes, measured from its audited year-end accounts. It can rise by at most one percentage point a year. A struggling co-op can defer part of its premium, as a debt to the pool. Otherwise the pool's own charges could push a weak co-op over the edge.
-- **Members pay for their own cover.** The premium for accounts is charged against account interest, in proportion to each person's protected balance. Members who take all their profit share in cash, as low-income members can, don't pay for cover they don't have. The premium for final wages is paid by the co-op as a whole, since everyone is covered.
-- **Coverage grows as the pool does.** Limits start lower and rise to the full amounts only as the pool's reserves reach their target of 3% of covered amounts, higher than for banks because nothing stands behind it. The pool buys reinsurance against a single large failure, where it can, and limits how much of its exposure can sit in one co-op or one industry.
+- **Yearly premiums, priced as if nothing will be recovered from members' savings.** Members' accounts rank behind the co-op's lenders, so when a co-op fails, there's usually little or nothing left for them. Premiums assume exactly that. They're set by an independent actuary from a published formula, and audited every year in both directions, like [the bank's rates](pilot-spec.md#what-market-rate-means).
+- **Final-wage cover is one flat rate for everyone,** as in Germany and France. Charging the riskiest co-ops more would charge care workers most for the cover that matters most to them.
+- **Savings cover is priced on things a co-op controls,** like the size of its reserve, how much it owes, and whether its accounts are on time, measured from its audited year-end accounts. Margins set by public payment rates, like Medicaid's, aren't counted against it. The premium can rise by at most one percentage point a year, unless audited accounts show the co-op getting worse.
+- **Deferring is limited.** A struggling co-op can defer up to one year's premium, as a debt to the pool. While it does, new additions to its members' accounts aren't covered, and the pool watches its accounts monthly. Deferred premiums count as nothing in the pool's reserve, and if the co-op fails, they're paid ahead of its members' accounts.
+- **Who pays.** Current members pay for cover of their own slices, out of their account interest, in proportion to each person's protected balance. Members who take all their profit share in cash, as low-income members can, don't pay for cover they don't have. The co-op as a whole pays for final-wage cover, since everyone is covered, and for former members' payouts. Those are debts the co-op owes, and charging the premium to former members would take most of the interest on money they can't touch.
+- **Other ways to cover former members.** A co-op can instead put former members' unpaid payouts in a fully funded escrow account, or back them with a surety bond from an approved insurer. The pool is the default. If private options come in cheaper, that's a useful check on the pool's prices.
+- **The reserve is kept safe.** It's held in Treasury securities by an independent custodian, out of reach of any co-op's creditors, as Europe's rules require of wage funds. It never holds the bank's loans or anything issued by co-ops, which would fail at the same time as the co-ops it insures.
 
-**What it costs, roughly.** A mature 40-person co-op might have $400,000 of protected account slices, $200,000 of former members' payouts outstanding, and $300,000 a year of payroll at risk in final wages. If premiums run 1% to 3% of the covered amounts, depending on the co-op's strength, that's roughly $6,000 to $25,000 a year. That's about 1% to 4% of the $600,000 annual profit in the [capital accounts example](capital-accounts.md#where-each-years-profit-goes). The real rates will come from the pool's actuary and its early experience, not from this guess.
+## What it should cost
+
+Nobody has priced insurance quite like this, but the pieces can be estimated from what's known.
+
+**Final wages: at least 0.25% of payroll.** Europe's wage guarantee funds are the closest match. Both are paid for by employers as a share of payroll:
+
+- **Germany** pays up to three months of unpaid wages when an employer goes insolvent. Employers paid 0.06% of payroll in 2023 and 2024, and pay 0.15% in 2025 and 2026. After the financial crisis the rate jumped to 0.41% in 2010 ([lohn-info.de](https://www.lohn-info.de/insolvenzgeldumlage.html); [Haufe](https://www.haufe.de/id/beitrag/insolvenzgeldumlage-fuer-2026-HI17106952.html)).
+- **France** covers wages and other amounts owed to workers, including severance, up to a ceiling. Employers pay 0.25% of each worker's pay, up to about €16,000 a month, in 2026 ([Service Public](https://entreprendre.service-public.gouv.fr/actualites/A17906)). In 2009 the rate rose from 0.10% to 0.20%, 0.30% and then 0.40% within a single year ([Eurojuris](https://www.eurojuris.fr/articles/augmentation-du-taux-de-cotisation-ags-au-1er-octobre-2009-10360.htm)).
+
+Both are run or required by the state and spread across every employer in the country, so their rates are a floor, not a benchmark. This pool covers less, eight weeks of wages, but it covers young, small firms in a few industries, with nothing behind it. So it starts at 0.25% of payroll, plus a charge to build its reserve, and the actuary adjusts from there.
+
+**Members' savings: probably 2% to 3% of covered amounts a year, and possibly much more.** When a co-op fails, members' accounts and unpaid payouts rank behind its lenders, so the pool should expect to pay almost the whole covered amount. What matters is how often covered co-ops fail owing more than they have. Three rough numbers bracket it:
+
+- **Closures.** Of US business locations opened in 2013, about 61% were still open after three years, when account cover starts. After that, roughly 7% to 10% closed each year ([Bureau of Labor Statistics](https://www.bls.gov/bdm/us_age_naics_00_table7.txt)). Those are locations, not firms, so some are branches of businesses that carried on.
+- **Not every closure is a failure.** In Census Bureau data, about a third of owners of closed businesses said the business was successful when it closed ([Headd, Census Bureau, 2001](https://ideas.repec.org/p/cen/wpaper/01-01.html)). That suggests something like 5% a year close unsuccessfully. But many "successful" closures were owners retiring or selling, which a locked co-op can't do, so for co-ops the real figure could be higher.
+- **Loan defaults.** Among the SBA's mature loan groups, loans making up 6% to 10% of the money lent eventually defaulted ([GAO-20-618](https://www.gao.gov/products/gao-20-618)). Spread over the life of the loans, that's roughly 1% a year. That's close to a floor: members can lose their savings in failures where the lender still gets paid.
+
+Worker co-ops may do better. The best study found them about 29% less likely to close, in Uruguay ([Burdín, 2014](https://journals.sagepub.com/doi/10.1177/001979391406700108)). But the pool shouldn't count on that until its own data shows it. So it starts at 2% to 3%: a strong co-op, with a large reserve and little debt, nearer the bottom, a weak one higher. These are starting guesses from rough data, and the pool publishes every year how its actual losses compare.
+
+**That's expensive.** The protected slice of a current member's account earns only the plain Treasury rate. With the charge to build the reserve, the premium takes nearly all of that interest.
+
+## Starting small
+
+A few hundred co-ops, all started in the same few years, can't spread this risk well. They're all at the riskiest age, and one recession hits them together. So cover comes in stages:
+
+- **From the start: final wages and former members' payouts,** for every covered co-op. These protect people with no say in how the co-op is run, and final wages are the biggest loss for low-paid workers.
+- **Current members' slices come later,** once the pool has seen about 1,000 years of co-op experience (say, 200 co-ops for five years) and its savings reserve has reached its target. Then each co-op can choose it, but only in a yearly window, based on audited accounts, with cover starting two years later. The pool can refuse a co-op that's showing warning signs. A co-op that opts out can't opt back in for five years. That stops co-ops from joining only when they're in trouble.
+- **Limits follow the reserve, not the calendar.** Every year, the limits are set by a published formula from the reserve the pool actually has, compared with what a bad recession would cost. If covered amounts grow faster than the reserve, the limits wait.
+
+## How big the reserve has to be
+
+Failures come in waves, and the waves last. US business bankruptcy filings ran about 22,000 a year in 2018 and 2019. In the last big recession they rose to about 43,500 in 2008, 60,800 in 2009, 56,300 in 2010, 47,800 in 2011 and 40,100 in 2012 ([American Bankruptcy Institute](https://abi-org.s3.amazonaws.com/Newsroom/Bankruptcy_Statistics/Total-Business-Consumer1980-Present.pdf); [US Courts](https://www.uscourts.gov/sites/default/files/statistics_import_dir/1209_f2.pdf)). Over those five years, that's about six normal years' worth of extra failures. And most small businesses that close never file for bankruptcy at all.
+
+If savings claims normally run 2.5% of covered amounts, six extra years' worth is about 15%. So:
+
+- **The target for savings cover is 15% of covered amounts,** not the 1.2% to 2% that government-backed funds aim for. Nothing stands behind this pool, so its reserve has to carry a long recession on its own. It doesn't count on reinsurance, which may not exist for this kind of risk.
+- **For final wages, about 10% of covered wages,** by the same reckoning.
+- **Building it takes time.** Premiums carry an extra point a year for savings cover, and an extra 0.1% of payroll for wage cover, until the targets are reached. For savings cover that takes about fifteen years if the pool doesn't grow, longer if it does, which is why limits follow the reserve.
+- **Surcharges wait for the recovery.** After a bad stretch, premiums can rise by up to one point of covered amounts for up to three years. But the surcharge starts only once national unemployment has stopped rising, so it doesn't hit co-ops at the bottom of a recession. Until then, if claims outrun the reserve, everyone is paid the same share of what they're owed, as below.
+- **Concentration is limited by limits, not refusals.** If one industry or one region grows past a set share of what's covered, cover limits for new additions there are lowered. No co-op is refused cover because of its industry.
+
+**What it costs, in the standard example.** A mature 40-person co-op might have $300,000 of protected account slices (at most $8,000 a member, and less for members who take their share in cash), $200,000 of former members' payouts outstanding, and about $2 million a year of payroll, with eight weeks of it, about $300,000, covered by final-wage cover.
+
+| Cover | Premium | A year |
+| --- | --- | --- |
+| Final wages | 0.25% of payroll, plus 0.1% to build the reserve | about $7,000 |
+| Former members' payouts | 2%–3%, plus 1 point to build the reserve | $6,000–$8,000 |
+| Current members' slices, once offered, if the co-op chooses | 2%–3%, plus 1 point | $9,000–$12,000 |
+| **All three** | | **$22,000–$27,000** |
+
+That's about 4% of the $600,000 annual profit in the [capital accounts example](capital-accounts.md#where-each-years-profit-goes), or about 2% without cover for current members. A strong co-op would pay less, a weak one more. Once the reserve reaches its target, the extra charges stop. The real rates will come from the pool's actuary and its own experience.
 
 ## Who runs it, and how claims are paid
 
-- **An independent board.** Most of its members are independent (actuaries, former insurance regulators, people with no stake in any co-op), not representatives of the co-ops that pay premiums. Otherwise the biggest co-ops could keep their own premiums low at everyone else's expense. Board members step aside from anything involving their own co-op.
-- **Federations can run their own pools** if they meet the same standards and reinsure each other, so insurance can stay close to the co-ops it covers. Co-ops outside a federation join the national pool.
-- **Automatic payment.** When a covered co-op fails, the pool pays from the co-op's own member register and payroll records. Nobody has to know to file a claim. Fagor's former workers lost their case partly because they filed too late. Disputes go to an independent adjudicator.
-- **Stepping in early.** Every covered co-op sends the pool quarterly accounts. If warning signs appear, the pool can stop covering *new* additions to accounts until the co-op recovers, which stops members from piling up covered savings in a sinking firm.
+- **A federal charter.** The pool is created by the same federal law as the bank, with a named federal regulator, capital standards, and a clause saying state insurance law doesn't apply to it. Otherwise it would need a license in every state, and federal law generally leaves insurance to the states unless Congress says otherwise.
+- **An independent board.** Most of its members are independent (actuaries, former insurance regulators, people with no stake in any co-op), appointed by a body separate from the bank, for fixed staggered terms, and removable only for cause. A minority are elected by covered workers. None represent the co-ops that pay premiums, so the biggest co-ops can't keep their own premiums low at everyone else's expense. Board members step aside from anything involving their own co-op. Limits on premiums are written into the charter, and a co-op can appeal its rate to the independent adjudicator.
+- **Checked every year.** An outside actuary publishes an opinion on the pool's reserves, and federal auditors audit it. The pool and the bank are stress-tested together, since the same recession would hit the bank's loans and the pool's claims at once. If the reserve falls below its target, the board publishes a plan to restore it within 90 days, and limits stop rising until it does.
+- **One pool, one register.** Federations can run their own pools only once each meets the national pool's reserve ratio on its own, since pools of co-ops all lose in the same recession. There's one national register of everyone covered, so the per-person limits hold across pools.
+- **Automatic payment.** When a covered co-op fails, the pool pays from the co-op's own member register and payroll records. Nobody has to know to file a claim. Fagor's former workers lost their case partly because they filed too late. Disputes go to an independent adjudicator. Final-wage payments are wages, so the pool or the liquidator pays them through payroll, with the usual withholding.
+- **The pool steps into the workers' shoes.** Once it pays wages, it takes over the workers' priority claims in bankruptcy ([When a Locked Co-op Goes Bankrupt](bankruptcy.md)) and under federal and state notice and wage laws, so it recovers what it can. Workers are never paid twice for the same weeks. Some states can make a company's largest owners personally liable for unpaid wages. In a co-op, those are workers, so the pool doesn't pursue ordinary members, only directors who hid losses.
+- **Stepping in early.** Every covered co-op sends the pool quarterly accounts. If warning signs appear, the pool can stop covering *new* additions to accounts until the co-op recovers, which stops members from piling up covered savings in a sinking firm. That freeze also applies to anyone who leaves after it starts, so members can't escape it by quitting.
 
 ## Closing the loopholes
 
-- **No paying out phantom profits.** Before paying, the pool's own auditor or the liquidator rechecks the last two years of accounts. Losses that were hidden or booked late are charged to accounts first. A covered balance can never be more than the allocations reported to the IRS.
-- **No quitting just before the fall.** Anyone who left within a year before a failure has their balance recalculated to share the losses of the year they left and the year after, before coverage applies.
-- **No stuffing accounts.** Amounts added to accounts in the year before a failure are covered only up to the co-op's normal split, meaning its average over the previous three years.
-- **No cover for brand-new shells.** Account cover starts after a co-op's first three years of audited accounts, and every covered co-op must pass the same checks as bank borrowers: real members doing most of the work, verified against payroll records (see [Guarding the Pilot](pilot-safeguards.md#the-hidden-boss)). Final-wage cover starts at once.
-- **No underreporting.** Payouts are based on the lower of what the co-op reported and what it actually owed. Unpaid premiums are deducted from payouts, and directors who file false reports are personally liable.
+- **No paying out phantom profits.** Before paying, the pool's own auditor or the liquidator rechecks the last three years of accounts, and for former members, the years since they left. Losses that were hidden or booked late are charged to accounts first. A covered balance can never be more than the allocations reported to the IRS.
+- **No quitting to upgrade your cover.** A current member's slice is covered up to $8,000, and a former member's payout up to $50,000. So for the first three years after someone leaves, their payout is covered only like a current member's slice. Anyone who left before a failure has their balance recalculated to share the losses of the years since they left. Someone rehired within three years goes back to current-member cover. And if an unusual share of the co-op's accounts leaves in one year, those departures get only current-member cover.
+- **No stuffing accounts.** Amounts added to accounts in the year before a failure are covered only up to the co-op's normal split, meaning its average over the previous five years.
+- **No inflated final wages.** Covered pay is the lower of a worker's average over the previous 12 months and what appears in the co-op's payroll tax filings. Paid time off counts only at the co-op's normal accrual. In a co-op's first year, final-wage cover is four weeks, not eight.
+- **No paying insiders first.** Loans that directors or members guaranteed personally, repaid in the year before a failure while wages went unpaid, are clawed back.
+- **No cover for brand-new shells.** Account cover starts after a co-op's first three years of audited accounts, and every covered co-op must pass the same checks as bank borrowers: real members doing most of the work, verified against payroll records (see [Guarding the Pilot](pilot-safeguards.md#the-hidden-boss)).
+- **No trading claims.** Covered claims can't be sold or transferred, except in a divorce or to an estate.
+- **No underreporting.** Payouts are based on the lower of what the co-op reported and what it actually owed. Unpaid premiums are charged to directors and to uncovered balances, not to protected ones, and directors who file false reports are personally liable.
+
+## What the pilot records
+
+The pool files its pricing model before the first co-op is covered, and each year publishes its predicted losses against its actual ones. For every claim, it records the covered amount at failure, what was recovered, and how long payment took, by type of cover. It also publishes which co-ops deferred premiums and which chose current-member cover, and compares wage losses with those at the matched conventional firms in [the pilot](pilot-spec.md#who-co-ops-are-compared-against). That's how the next design gets real numbers instead of these.
 
 ## No selling savings as something they're not
 
@@ -74,8 +137,8 @@ Both Fagor and the Italian co-ops got into trouble partly because members' money
 
 ## What it can't promise
 
-- **A wave of failures could outrun the pool.** Co-ops in the same region or industry tend to fail together, in the same recession. If claims exceed what the pool has, it pays everyone the same share of what they're owed at once, then pays the rest as money comes in. That rule is published in advance, and members are told about it every year. This model gives the pool no government backing, so it can't promise more. **It's insurance, not a guarantee.**
-- **It starts small.** It will be weakest in its early years. That's why coverage phases in, and why account cover starts only after three years.
-- **Members pay for it.** Premiums come out of account interest and profit. That's the honest price of making savings safer.
+- **A wave of failures could outrun the pool.** Co-ops in the same region or industry tend to fail together, in the same recession. The reserve target is sized for a recession like 2009's, but not a worse one, and it takes years to build. If claims exceed what the pool has, it pays everyone the same share of what they're owed at once, then pays the rest as money comes in. That rule is published in advance, and members are told about it every year. This model gives the pool no government backing, so it can't promise more. **It's insurance, not a guarantee.**
+- **It starts small.** It will be weakest in its early years. That's why coverage phases in, current members' slices come later, and account cover starts only after three years.
+- **Members pay for it, and it isn't cheap.** Premiums come out of account interest and profit. Insuring current members' savings could take most of the interest on the protected slice, which is why co-ops can choose not to. That's the honest price of making savings safer.
 - **Bankruptcy law may not cooperate.** Courts can push former members' claims to the back of the line, behind other creditors, which makes the pool's recoveries even smaller. That's another reason it assumes nothing comes back.
-- **The legal form is unsettled.** A pool like this is insurance under state law. It would probably need to be chartered by the same federal statute as the bank, or licensed as a mutual insurer in each state. This is listed in [Open Problems](open-problems.md).
+- **The legal form needs Congress.** Without the federal charter, a pool like this is insurance under state law, needing a license in every state. Whether insured capital accounts raise questions under securities law is also unsettled. Both are listed in [Open Problems](open-problems.md).