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 Over 94 percent of workers earn less than the earnings cap and have Social Security tax withdrawn from their paychecks until December 31.2 In other words, they pay Social Security taxes on 100 percent of their wage income.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.