Inequality is Weakening Social Security. Here’s How We Fix That.
When Congress set the cap on Social Security contributions in 1983, they didn’t anticipate forty years of rising inequality. And it’s cost us — a lot.
America’s top corporate executives love lecturing the rest of us about ‘fiscal responsibility.’ They want us to expect less from government. But they expect more, and a new report shows how they’re getting it.
By Sam Pizzigati
Last week, federal unemployment benefits for the 400,000 Californians out of work since last fall dropped almost 18 percent, a $52 cut out of an average $297 weekly check. Similar cuts have already started rolling out in other states.
In all, 3.8 million long-term unemployed Americans will on average lose near $1,000 each by September 30, the date that ends the 2012 federal fiscal year.
The direct cause of all these cuts: the “sequester,” the $85 billion in federal austerity budget reductions that kicked in this past March 1.
Who deserves the “credit” for this meat-axe sequester? Credit the power suits who occupy Corporate America’s loftiest executive suites. These top corporate executives — organized in groups like “Fix the Debt” and the Business Roundtable — have been lobbying relentlessly for deep cuts in federal spending.
Only significant cutbacks in programs near and dear to average Americans, these executives proclaim, can save the nation from debt disaster.
But these same top executives, says a new report released last week, are actually running up the federal debt — purely to enrich themselves.[pullquote]CEOs are running up the federal debt purely to enrich themselves.[/pullquote]
The giant firms these execs manage, details this new report from the Institute for Policy Studies and the Campaign for America’s Future, “are exploiting the U.S. tax code to send taxpayers the bill for the huge rewards they’re doling out to their top executives.”
How huge do these rewards go? UnitedHealth Group CEO Stephen Hemsley, a “Fix the Debt” endorser, pulled in $199 million between 2009 and 2011.
A convenient federal tax loophole — in place since 1993 — let UnitedHealth deduct $194 million of that windfall compensation on its corporate tax return. That deduction, in turn, saved UnitedHealth — and denied the federal treasury — $68 million, enough to extend full federal unemployment benefits for the rest of the 2013 fiscal year to over 65,000 jobless Americans.
The loophole UnitedHealth so lucratively exploited lets companies deduct off their taxes every dollar of “performance pay” they shovel into their executives’ personal pockets. UnitedHealth, of course, hardly stands alone here. All American corporate and banking giants play the “performance pay” game.
The 90 giant firms that belong to “Fix the Debt” play the game particularly well. Between 2009 and 2011, the deductions these 90 claimed for top executive “performance pay” added at least $953 million — and maybe as much as $1.6 billion — to America’s national debt.[pullquote]‘Fix the Debt’ CEOs play the pay-for-performance game at taxpayer expense.[/pullquote]
The U.S. tax code’s exceedingly bountiful “performance pay” loophole has its roots in an earlier epoch of American public outrage at excessive CEO pay. Back in 1992, Bill Clinton campaigned against over-the-top executive pay in his drive for the White House. Congress, just months after Clinton’s inauguration, would go on to pass legislation that lawmakers hailed as a check on CEO excess.
The new law allowed corporations to deduct off their taxes no more than $1 million in compensation per executive. But the law had a huge escape hatch. Firms could exempt any “performance-based” pay from the $1 million limit.
The predictable result? An explosion of “performance-based” compensation, particularly in the form of stock options, an explosion that would keep CEO pay soaring. CEOs had been averaging 42 times U.S. worker pay in 1982. By 1992, the gap had jumped to 201 times. The average gap today: 354 times.
The “performance pay” loophole, the new Institute for Policy Studies and Campaign for America’s Future report stresses, has served “as a critical subsidy for excessive compensation.”
“The larger the executive payout, the less the corporation pays in taxes,” the report explains. “And average taxpayers wind up footing the bill.”[pullquote]The more U.S. corporations pay their top executives, the more they can deduct off their taxes.[/pullquote]
That footing would end if legislation Representative Barbara Lee from California has introduced ever became law. Her Income Equity Act would deny corporations a tax deduction on any executive compensation that runs over 25 times the pay of a company’s lowest-paid workers or $500,000.
Interestingly, the Affordable Health Care Act enacted in President Obama’s first term sets a $500,000 cap, effective this year, on how much health insurers like UnitedHealth can deduct for executive compensation.
With this cap now law for health care execs, notes the new Institute for Policy Studies and Campaign for America’s Future report, “taxpayers won’t have to worry so much about their hard-earned dollars going to subsidize fat paychecks for CEOs like Stephen Hemsley of UnitedHealth.”
“But,” sums up the study, “taxpayers may want to wonder why — at a time of scarce government resources — their tax dollars are subsidizing fat paychecks at any American corporate giant.”
Labor journalist Sam Pizzigati, an Institute for Policy Studies associate fellow, writes widely about inequality. His latest book, The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970, has just been published.