By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in Asia researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as writes occasional travel pieces for The National.
The Institute for Policy Studies (IPS) earlier this month released its second annual report on the CEO-worker retirement benefit gap. A Tale of Two Retirements analyzes how CEOs are provided with colossal nest eggs– monthly retirement checks ranging from more than $100,000 to more than $1,000,000– while at the same time many of their companies pursue strategies that erode retirement security for their employees.
The CEO-worker retirement benefit gap has become such a chasm, not as the result of executives working harder or investing more wisely, but as “yet one more example of rule-rigging in favor of the 1%,” according to the IPS.
Benefits Go Disproportionately to Those at the Top
As an aside, I should mention another item in yesterday’s news: the phenomenon that the IPS report discusses is not just confined to the US, nor is it limited solely to CEO retirement benefits. The Financial Times reported in ‘Negligible’ link found between executive pay and performance on a similar disconnect in Britain, this documented in a Lancaster University Management School study. From the pink paper:
The correlation between high executive pay and good performance is “negligible”, a new academic study has found, providing reformers with fresh evidence that a shake-up of Britain’s corporate remuneration systems is overdue.
Although big company bosses enjoyed pay rises of more than 80 per cent in a decade, performance as measured by economic returns on invested capital was less than 1 per cent over the period, the paper by Lancaster University Management School says.
“Our findings suggest a material disconnect between pay and fundamental value generation for, and returns to, capital providers,” the authors of the report said.
In a study of more than a decade of data on the pay and performance of Britain’s 350 biggest listed companies, Weijia Li and Steven Young found that remuneration had increased 82 per cent in real terms over the 11 years to 2014.
Much of the increase was the result of performance-based pay. But, the report’s authors say, the metrics used to assess performance — such as total shareholder return and earnings per share growth — are unsophisticated and short-termist, acting against the interests of long-term investors. The research found that the median economic return on invested capital, a preferable measure, was less than 1 per cent over the same period.
CEO Retirement Benefits Compared to Ordinary Workers
As the IPS study summarizes:
The sum of the 100 largest CEO company retirement funds — $4.7 billion — is equal to the entire retirement account savings of the 41 percent of American families that have the least amount of retirement savings (this represents 50 million families and 116 million people).
On average, the CEOs’ nest eggs are worth nearly $47.5 million. If converted to an annuity at age 65, this would be enough to generate a $253,088 monthly retirement check for the rest of their lives. Contrast that with the situation for ordinary workers. For those lucky enough to have a 401(k) plan, the median balance at the end of 2013 was just $18,433, enough for a monthly retirement check of just $101 (IPS report, p. 5)
Over the last several decades, the trend has been for retirement plans for ordinary US workers to shift from defined benefit to defined contribution plans (for those workers lucky enough to have any retirement plan). The IPS study notes that according to the Economic Policy Institute, the share of prime working age families covered by a defined benefit pension plan plummeted from 41 percent in 1989 to 21 percent in 2013. Even worse, among the baby boomer generation, 39 percent of workers aged 56-61 years old have no employer-sponsored retirement plan whatsoever, leaving them dependent on Social Security, which pays out average benefits of $1,239 per month per beneficiary (IPS report p. 5).
The IPS study discusses some of the many rules and regulations that disadvantage ordinary workers, compared to those that apply to CEOs (and by extension other privileged members of the C-suite– although this aspect is not discussed in the IPS report) in three key areas: pension rules, compensation rules, and tax rules.
In the area of pension rules, according to the IPS:
Ordinary workers face strict limits on how much pre-tax income they can invest each year in tax-deferred plans like 401(k)s. But most Fortune 500 firms set up special unlimited tax-deferred compensation accounts for their executives where their money can grow, tax-free, until they retire and withdraw it.
The IPS notes that in 2015 alone, Fortune 500 CEOs saved $92 million on their taxes by parking $238 million more in these tax-deferred accounts, than they would have been able to do if their retirement accounts were subject to the same caps that limit contributions by ordinary workers.
As for compensation rules, the IPS notes:
Since more than half of executive compensation is now tied to the company’s stock price, CEOs have a powerful personal incentive for slashing worker retirement benefits in order to boost the short-term bottom line. Every dollar not spent on employee retirement security is money in the CEO’s pocket.
And finally, in the area of tax rules, performance-based tax systems have a pernicious effect:
Tax rules: CEO retirement funds are growing because CEO pay is growing and much of it is stashed in executive tax-deferred retirement accounts. Our tax code encourages excessive CEO pay by allowing corporations to deduct unlimited amounts of executive compensation off their federal income taxes, as long as it is “performance-based.” The more corporations pay their CEO, the less they owe in taxes. The rest of us make up the difference.
The IPS report is not so long– only 21 pages– and I encourage interested readers to look at it in full– especially the sections of the history of the retirement divide (IPS 10-13). This describes the legal and regulatory changes that allowed many corporations, led by rapacious CEOs and their enablers, to erode the pension and other benefits of ordinary workers while systematically feathering their own nests. The huge spike in unequal retirement benefit treatment is by no means a natural phenomenon, but the logical consequence of a systematic campaign to shift wealth upward.
What Is to Be Done
The IPS report describes specific policies and rules and regulations in various areas, e.g., including tax law, Social Security and pension, labour, and procurement provisions– that disproportionately reward company executives. Beginning in earnest during the Reagan administration, these laws have been changed to inordinately benefit those at the top of the corporate economic pyramid.
The report recommends eight specific targeted policy changes (although admittedly, some o these are rather vague) that could rein in and perhaps reverse the accumulation of retirement assets for the topmost earners, and expand the funds available to improve retirement security for everyone else. These policy changes fall into four categories for reform: tax , social security and pension, labor, and procurement.
In the tax reform area, the IPS makes three recommendations, which are the most detailed of the eight reform proposals mentioned in this study. It’s important to keep such ideas front and center, as any Trump tax reform plan is unlikely to focus on retirement inequality. First, the IPS recommends that corporate executives should be subject to the same contribution caps that apply to the workers they employ. Currently, older workers may contribute a maximum of $24,000 in their corporate 401(k) accounts while younger workers are limited to no more than $18,000. Tax-deferred CEO compensation should be subject to the same limits.
Second, corporations that have frozen their worker pensions, closed existing plans to new hires, or maintain employee underfunded pension accounts (e.g., not funded at the 90 percent level), should not be allowed to deduct executive pension and retirement costs from their federal tax liabilities. To allow otherwise– as at present– means taxpayers subsidize lavish executive retirement packages for employers who have eschewed providing for the retirement security of their employees.
And third, one reason executive pay has further ballooned over roughly the last two decades is due to the 1993 tax reform that capped the tax deductibility of executive compensation at $1 million but allowed corporations to deduct unlimited amounts of stock options and other “performance-based” pay amounts from their federal income tax liabilities. Far from reining in executive pay, the reform merely changed the form in which it was awarded. The IPS endorses the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act, which would cap the tax deductibility of compensation at $1 million for every employee, executive or otherwise, regardless of position, as well as eliminate the “performance pay” exemption.
The report closes with some vague recommendations, calling for strengthening Social Security, safeguarding public pensions, and supporting universal retirement funds. I should caution there’s much snake oil being peddled around the issue of Social Security reform and strengthening retirement security, and it is important that one maintains a degree of skepticism whenever these issues are discussed– whatever the origin of the reform proposals.
The report also calls for strengthening labor unions, and finally, closes, with another concrete proposal, to prohibit large government contractors from providing executives with retirement benefits that exceed those received by former Presidents of the United States– which IPS estimates at roughly $200,000 per year.
These proposals are far from a panacea for reversing the massive shift of retirement assets from ordinary workers to CEOs. But at least they provide a starting point for the tough work of further political organizing.