Tuesday, May 10, 2005


Cutting Social Security benefits for the working wealthy

I guess it's "Corporate Governance Day" at Simply Appalling.

President Bush, repeatedly challenged to offer some solution to the "Social Security problem" that he sees looming before us, has finally given birth to an idea: He would index benefits. The wealthy and the middle class would have their benefits cut; the poor would go on as usual (being poor).

It's a simple idea, as you would expect from anything that the President might be able to articulate. And it's a destructive idea,1 as you also might expect.

I worry about the working rich, because they are more deserving than the rest of us, and the thought of them suffering in their retirement years is almost more than I can bear. To make matters worse, I've just discovered that their Social Security benefits may need to be cut even more than Bush is letting on.

Lucian Bebchuk & Robert Jackson of Harvard Law School have released what The Economist calls an "extraordinary paper on executive pensions [that] reads like a piece of investigative journalism." The study is called "Putting Executive Pensions on the Radar Screen." This is from the abstract—

Because public firms are not required to disclose the monetary value of executives’ pension plans in their executive pay disclosures, financial economists and the media alike have generally analyzed executive pay using figures that do not include the value of such pension plans. .... For the set of [S&P 500] companies whose executives had a pension plan (68% of companies), our findings are as follows:
  • The executive’s pension plan provided an annual payment with an average value of $1.1 million (ranging from $360,000 to $2.3 million) and had an average actuarial value of $15.1 million (ranging from $3.3 to $41.3 million).
  • The pension value was on average nearly three times the total salary the executives earned during their tenure as CEO, and it was equal on average to 44% of the total compensation (including both equity and non-equity pay) the executives received during their service as CEO.
  • Including pension values increased the fraction of compensation made of salary-like payments (salary during service as CEO and pension payments afterwards) from 16% to 39%, and reduced the fraction of pay that is equity-based from 57% to 42%.

We conclude that the standard omission of pension plan values by researchers and the media leads to:

  1. Significant underestimation of the magnitude of executive pay,
  2. Severe distortion of comparisons among executive compensation packages, and
  3. Significant overestimation of the extent to which executive pay is linked to performance and the fraction of compensation that is equity-based.

I fear that neither The Economist nor the study authors have paid sufficient attention to executive privacy. They disclose, for instance, the case of Hank McKinnell, "chief of Pfizer since 2001, chairman of the powerful Business Roundtable, and a former co-chairman of its corporate governance task force"—

Mr McKinnell has received total compensation of about $67m to date—but the value of his pension plan is even greater than that. At present, say the authors, he stands to receive an annual pension of $6.5m on his retirement in three years’ time.

Well, if this isn't a fine kettle of corporate larceny. If this is allowed to continue executive Social Security benefits will be reduced to zero.

I'm seriously considering the launch of a petition to "Save Social Security for the Wealthy." They may have to take a cut in their corporate pensions to make it work, but no way would I see them deprived of what the rest of us get.

Related post
George Bush: Cheerleader-in-Chief of Social Security "reform" (2/14/05)


1By including the "middle class" in the cuts, it wouldn't be long before Social Security would be viewed as a "welfare program"—and you know what happens to welfare programs. A few years down the road, the Right will "ramp up" their usual class-warfare activities, convince the middle class (such as will be left) that their problems stem from the undeserved Social Security benefits that the poor receive. And the Roosevelt "New Deal" will finally be dead.

NY Times columnist and economist Paul Krugman did some calculations on Bush's indexing plan—

[D]efenders of Mr. Bush's Social Security plan now portray benefit cuts for anyone making more than $20,000 a year, cuts that will have their biggest percentage impact on the retirement income of people making about $60,000 a year, as cuts for the wealthy.

These are people who denounced you as a class warrior if you wanted to tax Paris Hilton's inheritance. Now they say that they're brave populists, because they want to cut the income of retired office managers.

Let's consider the Bush tax cuts and the Bush benefit cuts as a package. Who gains? Who loses?

Suppose you're a full-time Wal-Mart employee, earning $17,000 a year. You probably didn't get any tax cut. But Mr. Bush says, generously, that he won't cut your Social Security benefits.

Suppose you're earning $60,000 a year. On average, Mr. Bush cut taxes for workers like you by about $1,000 per year. But by 2045 the Bush Social Security plan would cut benefits for workers like you by about $6,500 per year. Not a very good deal.

Suppose, finally, that you're making $1 million a year. You received a tax cut worth about $50,000 per year. By 2045 the Bush plan would reduce benefits for people like you by about $9,400 per year. We have a winner!

.... Repealing Mr. Bush's tax cuts would yield enough revenue to call off his proposed benefit cuts, and still leave $8 trillion in change.

.... Now that tax cuts have busted the budget, they want us to accept large cuts in Social Security benefits as inevitable. But they demand that we praise Mr. Bush's sense of social justice, because he proposes bigger benefit cuts for the middle class than for the poor.


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