naked capitalism

Is the leopard changing its spots? First we have the Wall Street Journal, of all places, lambasting Goldman, while incredibly, the Washington Post springs to its defense. If that isn’t bizarre enough, today we have the Wall Street Journal, which along with just about every mainstream media outlet, likes to inveigh about coming Social Security deficits, points out something quite underappreciated: that the combo plate of ceilings on payroll taxes and more income flowing to the top echelon of society (some in the form of compensation that comes via tax advantage capital gains) means there is a lot of labor-related income that is not subject to Social Security taxes.

A dose of Koyaanisqatsi is in order.

As an aside, the hysteria about Social Security is way overdone. Yes, it needs to be fixed, but on the one to ten degree of difficulty, this one is not hard. Social Security was created when the average lifespan was 69. We need to do some combination of raising the age at which workers can receive payment, eliminate the ceiling on payroll taxes, and end the tax breaks (at a minimum) for the upper middle income and wealthy (85% of Social Security payments are exempt from taxes). Eliminating the ceiling alone would mean Social Security was adequately funded for the next 75 years.

Back to the Journal. 1/3 of all pay goes to “highly compensated employees,” meaning those who earn more than the Social Security ceiling, and their pay has been rising faster than for the rest of the workers. And that exclude stock-based pay.

From the Journal:

Executives and other highly compensated employees now receive more than one-third of all pay in the U.S.,…
Highly paid employees received nearly $2.1 trillion of the $6.4 trillion in total U.S. pay in 2007, the latest figures available. The compensation numbers don’t include incentive stock options, unexercised stock options, unvested restricted stock units and certain benefits.

The pay of employees who receive more than the Social Security wage base — now $106,800 — increased by 78%, or nearly $1 trillion, over the past decade, exceeding the 61% increase for other workers, according to the analysis. In the five years ending in 2007, earnings for American workers rose 24%, half the 48% gain for the top-paid. The result: The top-paid represent 33% of the total, up from 28% in 2002.

The growing portion of pay that exceeds the maximum amount subject to payroll taxes has contributed to the weakening of the Social Security trust fund…

The data suggest that the payroll tax ceiling hasn’t kept up with the growth in executive pay. As executive pay has increased, the percentage of wages subject to payroll taxes has shrunk, to 83% from 90% in 1982. Compensation that isn’t subject to the portion of payroll tax that funds old-age benefits now represents foregone revenue of $115 billion a year.

The magnitude of executive pay has been difficult to measure, even as policy makers grapple with ways to rein in compensation at companies receiving taxpayer bailouts…But payroll taxes provide an indirect way to calculate amounts executives receive…

Social Security data show that 6% of wage earners have pay that exceeds the taxable earnings base, and that their “covered earnings” above the taxable maximum totaled $1.1 trillion in 2007. Adding the portion of their pay below the taxable wage base, $991 billion, totals $2.1 trillion.

The $2.1 trillion figure understates executive pay, however, because it includes just salary and vested deferred compensation, including bonuses. It doesn’t include unvested employer contributions and unvested interest credited to deferred-pay accounts. Nor does it include unexercised stock options (options aren’t subject to payroll tax until exercised), and unvested restricted stock (which isn’t subject to payroll tax until vested; the subsequent appreciation is taxed as a capital gain).

Also not included in the total compensation figures is executive pay never subject to payroll tax. This category includes incentive stock options (which are generally taxed as capital gains), “carried interest” income received by hedge-fund and private-equity fund partners (also taxed as capital gains), and compensation characterized as a benefit (benefits generally aren’t subject to any taxes).

Benefits, a category that includes employer-provided health care and contributions employers make to rank-and-file pension plans, totaled nearly $1 trillion in 2007; it isn’t possible to tell what portion represents benefits for executives, such as life insurance.

The ability to delay paying payroll taxes on compensation, something that generally is available only to highly paid employees, is in itself an economic benefit that ultimately boosts paychecks…

Social Security Administration actuaries estimate removing the earnings ceiling could eliminate the trust fund’s deficit altogether for the next 75 years, or nearly eliminate it if credit toward benefits was provided for the additional taxable earnings.