Taxpayers for A Day: Wall Street CEOs Have Most to Gain, Least To Risk, in Social Security Privatization Schemes

CEOs Pushing for Privatization Hit Annual Earnings Cap After an Average of Four Days

Bloated CEO Pay Packages Insulate Them From Privatization Risks

A Report by United for a Fair Economy and Institute for America’s Future

Scott Klinger and Adam Luna

With assistance from Christina Kasica and Lorenzo Nencioli

April 13, 2005

Summary

This report dramatizes that the very same CEOs whose financial services companies are advocates for Social Security privatization take the least personal risk in reforming the system. Their pay packages are so enormous that, on average, they only spend the first 4 days of the year paying into the Social Security system. In 2004, 7 of 26 CEOs reached the 2004 earnings cap of $87,900 in less than one day. Introduction

The Bush administration and its allies have relied on substantial corporate involvement to advance their privatization effort, including support from Wall Street financial companies. Many companies are members and funders of the Securities Industry Association (SIA), Wall Street’s principal lobbying group, which has advocated for Social Security privatization for over a decade. As recently as Thursday, April 7, 2005, SIA reaffirmed its public leadership in the privatization effort in a public advertisement listing leaders of the Coalition for the Modernization and Protection of America’s Social Security (CoMPASS).1

These firms and their CEOs will directly profit from administering private accounts and collect billions of dollars in management fees. Yet the CEOs of these companies, because of their bloated pay packages, only pay into the Social Security trust fund an average of four days a year.

In 2004, Social Security tax was paid only on the first $87,900 of earnings. In 2005, the earnings cap was raised to $90,000. American workers contribute at an effective rate of 12.4% (6.2% contributed directly by the employee, and 6.2% by the employer) throughout the year.

Over 94 percent of workers earn less than the earnings cap and have Social Security tax withdrawn from their paychecks until December 31.2 In other words, they pay Social Security taxes on 100 percent of their wage income. The effective rate of Social Security taxes on these “Joe” and “Juanita” taxpayers is 12.4 percent.

The 26 financial industry CEOs that we studied had 2004 pay packages averaging over $17.7 million. Because of the earnings cap, they are effectively done paying their share of Social Security taxes only four days into the new year.

An Invisible Tax on Workers: Wall Street’s Management Fees

Privatizing Social Security will siphon off a share of the nation’s largest investment portfolio for private Wall Street firms. Currently the cost of administering Social Security is about six-tenths of one percent, so there is significant money to be made by Wall Street – and lost by workers – in shifting to private portfolios with fees almost twice as high as current fees.3

These are the same firms whose growth in the 1990s was fueled by the conversion from defined-benefit pension programs to individual 401(k) plans. Wall Street also managed these large defined-benefit pensions, but these portfolios accrued wholesale priced management fees, typically half a percent of assets or less. Newer 401(k) plans are typically invested in mutual funds with retail priced management fees that are often one percent of assets or more, double the fees charged a large defined-benefit pension fund.

A government-backed redirection of Social Security investments into mutual funds with retail fee structures is a very attractive prospect for finance industry CEOs. But the risks to the retirement security of average American workers makes the scheme unacceptable, except to the Wall Street firms pushing it and the administration officials working with them. Findings: Wall Street CEOs Pay Little Into the System

This report examines the pay and benefits of Wall Street CEOs who lead financial services firms that support Social Security privatization.

Of the 48 firms identified by researchers as financial services companies supporting Social Security privatization, 22 are either privately held or foreign-owned, making executive compensation comparisons impossible. The remaining 26 companies we studied are board members of the Securities Industry Association and/or the Financial Services Roundtable Committee on Retirement.

Many of these same companies have also contributed to lobbying groups working for privatization including USA Next, Citizens for a Sound Economy, and the Alliance for Worker Retirement Security, a major business-funded lobby for privatization. They have also provided funding for pro-privatization think tanks such as the American Enterprise Institute, the Heritage Foundation and the Cato Institute, which developed the Social Security Choice program (formerly known as the CATO Project on Social Security Privatization).4

Executive compensation for these companies was determined by researching recently released proxy statements for 2004.5 Total compensation for CEOs included stock options, deferred compensation, and a wide variety of bonuses and perks, some of which is not subject to Social Security taxes. For the purposes of this study, we assume that all forms of executive compensation were subject to Social Security taxes.

• Of the 26 CEOs at public and U.S.-owned firms, average compensation in 2004 was $17,712,239.

• Subjecting all compensation to Social Security taxation, the average CEO within this group would surpass the $87,900 earnings cap after 4 days on the job, or at the end of the day on January 4, after which no Social Security tax would be collected.

• While 94 percent of workers effectively pay 12.4 percent of their annual income, including employer’s contribution, these CEOs pay an average effective rate of 0.16 percent of their annual income toward Social Security taxes (Social Security payments divided by total compensation).

• An average “Joe” or “Juanita” taxpayer pays an “effective” Social Security rate of 12.4 percent. This is more than 200 times the effective rate paid by the average CEO in this group, which is 0.16 percent. We call this the “Joe-to-CEO” index.

• Seven of the CEOs are “taxpayers for a day.” Their salaries were so high, they exceeded the $87,900 earnings cap in eight hours or less. These include the CEOs of Bear Stearns, Charles Schwab, Goldman Sachs, Lehman Brothers, Morgan Stanley and Wells Fargo/ Strong Financial.

• The lowest paid CEO among the industry group, Carl H. Lindner, earned $1,524,200 as chief of American Financial Group. He paid for Social Security taxes for 18 days. Personal Stories

These CEOs are not men who will be depending on their Social Security check for their basic survival in their retirement years. Yet they are willing to encourage working Americans to gamble with theirs.

• Kennedy Thompson, CEO of Wachovia, heads one of the financial firms most active in efforts to privatize Social Security. The company supports the pro-privatization Alliance for Worker Retirement Security and Citizens for a Sound Economy. As the country’s third largest retail brokerage firm, it is well positioned to be a major beneficiary of private accounts. Thompson hauled in $13.3 million in compensation in 2004. He was done paying into the Social Security Trust Fund after two days or at the end of January 2. If he paid Social Security tax all year, he would have paid $1,654,644 instead of $10,900. The average “Joe” taxpayer pays an effective rate of Social Security taxes (12.4 percent) that is 152 times more than the effective rate paid by Thompson (.08 percent).

• David Pottruck, Charles Schwab’s CEO for most of 2004, was one of the highest paid CEOs of the group. He collected $38.3 million in 2004 compensation. With this level of compensation, Pottruck finished paying his Social Security tax after 6 hours, at half- time during the annual Rose Bowl football classic on January 1. If Pottruck’s entire compensation were subject to Social Security tax, his bill last year would have been $4,759,644, rather than the $10,900 he paid.6 Charles Schwab, who replaced Pottruck as CEO during the year, was personally credited with suggesting the 2003 dividend tax cut to President Bush, and was one of the instrumental voices backing Social Security privatization. The average “Joe” taxpayer pays an effective Social Security tax rate (12.4 percent) that is 436 times more than the effective rate paid by Pottruck (0.03 percent).

• Wells Fargo CEO Richard M. Kovacevich was the highest paid among the financial services industry, hauling in $52.1 million in 2004. Wells Fargo is a contributor to the extreme right-wing Club for Growth, a principal advocate of Social Security privatization.7 Kovacevich was done paying into Social Security after 4 hours, or shortly after many New Year’s revelers are waking up around lunchtime on New Year’s Day. If the $87,900 cap had been removed, Kovacevich would have paid $6,465,011 into the trust fund instead of $10,900.8 The average “Joe” taxpayer pays an effective Social Security tax rate (12.4 percent) that is 593 times more than the effective rate paid by Kavocevich (0.02 percent).

• Morgan Stanley CEO Phillip J. Purcell is currently embattled over his future leadership of the company. That didn’t stop him from taking home a 2004 pay package of over $40.5 million. Morgan Stanley sits on the board of the Securities Industry Association, a principal proponent of privatization. Purcell was done paying into the Social Security Trust fund after less than five and one-half hours, or at 1:30 pm on New Year’s Day. The average “Joe” taxpayer pays an effective Social Security tax rate (12.4 percent) that is 461 times that of the effective rate paid by Purcell (0.03 percent). Conclusion: Lift the Cap

The Social Security system is facing some financial stress in outlying decades. The financial services industry has tried to use this long-term shortfall to project a “crisis” as justification for a movement to privatize the funds. Private accounts will do nothing to protect the financial viability of the system – and will worsen the federal deficit as part of any transition scenario.

But this study reveals one important reform that would contribute to the healthy viability of the Social Security trust fund: eliminating the cap on contributions. These Wall Street CEOs, with their imperial compensation packages, are a textbook example of why the earnings cap should be eliminated, as it already is on Medicare.

According to the Economic Policy Institute, removing the Social Security earnings cap virtually eliminates the funding gap. Removing the earnings cap on taxes and benefits improves the 75- year actuarial balance, thereby eliminating 90 percent of the funding deficit projected by the Social Security Administration.9

If Wall Street CEOs pay into the system all year long, perhaps they’ll have a greater stake in ensuring that we have a rock-solid retirement system works for everyone, not just the affluent. Notes on Methodology

In computing executive pay, we included the following items as reported in the company’s most recent proxy statement filed with the Securities and Exchange Commission: Salary, Bonus, Restricted Stock, Long-Term Incentive Compensation, Commissions, Other Annual Compensation, All Other Compensation and Gains on Exercised Stock Options. Two firms, American International Group and American Financial Group, had not yet reported their 2004 executive pay by April 11, 2005; therefore we used their executive pay reported for the previous year.

There are two principal forms of calculating executive pay. One counts the present value of stock granted in the current year, and the other counts the realized value of stock exercised in the current year. Both methods have their strengths and weaknesses. The principle weakness of counting the value of stock options granted is that it is an estimate based on a number of inputted assumptions. We have opted for the precision of including the value of realized gains, understanding that some executives realize multiple-year gains in a single year, while others realize no gains at all in some years. This methodology overstates the pay of those who exercised multiple year options in a single year and significantly understates those who received new stock option grants during the year but chose not to exercise grants from previous years. However, taken as a group, we believe our chosen method presents a more precise measure of executive pay, without relying on assumptions and estimates.

In calculating the number of days that executives work to meet their Social Security obligations, we have assumed the typical CEO works six days a week (312 days a year). We have divided their maximum Social Security contribution of $10,900 by their daily rate of pay in order to determine how many days they must work to pay their Social Security tax.

In calculating the CEOs’ effective Social Security tax rate, we have divided the maximum Social Security contribution for 2004, $10,900, into the CEO’s total compensation. The “CEO-to-Joe” ratio is calculated by dividing the average worker’s effective Social Security effective tax rate, 12.4 percent (the rate paid by 94 percent of Americans), by the CEO’s effective Social Security tax rate. Table 1: CEO to Worker Pay Ratios at Key Companies Supporting Social Security Privatization

Effective Days Social Joe/ 2004 Daily to Security CEO Company CEO TOTAL Pay Pay Rate Ratio AG Edwards Robert Bagby 1,639,499 5,255 16.7 0.66% 18.7 Alliance/Sanford Lewis A. Sanders 12,736,773 40,823 2.2 0.09% 144.9 American Express Kenneth E. Chenault 19,820,599 63,528 1.4 0.05% 225.5 American Fin. Group Carl H. Lindner 1,524,200 4,885 18.0 0.72% 17.3 AIG MR Greenberg 14,595,067 46,779 1.9 0.07% 166.0 Bank of America Kenneth D. Lewis 19,250,496 61,700 1.4 0.06% 219.0 Bank of New York Thomas A. Renyi 13,152,756 42,156 2.1 0.08% 149.6 Bear Stearns James E. Cayne 26,259,557 84,165 1.0 0.04% 298.7 Charles Schwab David S. Pottruck 38,384,228 123,026 0.7 0.03% 436.7 CIGNA H. Edward Hanway 13,312,000 42,667 2.1 0.08% 151.4 Citigroup Charles Prince 19,567,564 62,717 1.4 0.06% 222.6 Franklin Resources Gregory Johnson 7,284,272 23,347 3.8 0.15% 82.9 Goldman Sachs Henry M. Paulson 29,789,359 95,479 0.9 0.04% 338.9 JP Morgan Chase William Harrison 15,719,320 50,382 1.7 0.07% 178.8 Legg Mason Wood Walker Raymond A. Mason 19,706,433 63,162 1.4 0.06% 224.2 Lehman Bros R.S. Fuld, jr. 35,257,099 113,004 0.8 0.03% 401.1 Mellon Martin G. McGuinn 8,327,446 26,691 3.3 0.13% 94.7 Merrill Lynch E. Stanley O’Neal 32,119,353 102,947 0.9 0.03% 365.4 MetLife Robert Benmosche 9,055,956 29,026 3.0 0.12% 103.0 Morgan Stanley Philip J. Purcell 40,530,287 129,905 0.7 0.03% 461.1 Nationwide W.G. Jurgensen 1,802,785 5,778 15.2 0.60% 20.5 Prudential Arthur F. Ryan 9,724,763 31,169 2.8 0.11% 110.6 Raymond James Thomas A. James 2,877,878 9,224 9.5 0.38% 32.7 Sun Trust Philip Humann 2,599,436 8,332 10.6 0.42% 29.6 Wachovia Kennedy Thompson 13,343,906 42,769 2.1 0.08% 151.8 Wells Fargo Richard Kovacevich 52,137,191 167,106 0.5 0.02% 593.1

Average 17,712,239 4.1 0.16% 201.5 Median 13,969,487 2.0 0.08% 158.9

Note: Compensation numbers for American International Group and American Financial Group are from 2003. Endnotes

1. See CoMPASS’s Advertisement from April 7, 2005 listing SIA endorsement: http://www.generationstogether.net/resources/Fix_SS_Now_CoMPASS_Ad.pdf 2. Economic Policy Institute, “Top earners get Social Security windfall, others get the bill,” March 9, 2005. See: http://www.epinet.org/content.cfn/webfeatures_snapshots_20050309 3. Dean Baker and David Rosnick, “Basic Facts on Social Security and Proposed Benefit Cut,” Center for Economic and Policy Research, March 2005. See web link: http://www. cepr.net/publications/facts_social_security.htm 4. For a survey of “Wall Street Links to Groups Attacking Workers’ Retirement Security,” see: http://www.aflcio.org/issuespolitics/socialsecurity/wallstreetgreed/wsg_retirement. cfm#chart 5. Two of the companies have not yet filed their proxy statements for 2004, so we have included their 2003 compensation numbers. They are American International Group, and American Financial Group. 6. David Pottruck calculation: If Mr. Pottruck paid the entire 12.4% Social Security tax on his $38 million pay package, his Social Security tax payment would be $4.76 million. 7. “Wall Street Links to Groups Attacking Workers’ Retirement Security,” see: http://www. aflcio.org/issuespolitics/socialsecurity/wallstreetgreed/wsg_retirement.cfm#chart 8. Kovacevich calculation: If Mr. Kovacevich paid the entire 12.4% Social Security tax on his $52 million pay package, his Social Security tax payment would be $6.47 million. 9. Economic Policy Institute, “Removing the Social Security earnings cap virtually eliminates funding gap,” February 17, 2005. See: http://www.epinet.org/content.cfn/webfeatures_ snapshots_20050217