Retirement Insecurity – A Tale Of Two Retirements – CEOs And The Rest Of Us
Changing the rules that allow platinum pensions for CEOs and increase retirement insecurity for the rest of us
Co-published by the Center for Effective Government and the Institute for Policy Studies
Sarah Anderson directs the Global Economy Project at the Institute for Policy Studies and has co-authored 22 IPS annual reports on executive compensation. She serves on the Investment Subcommittee of the U.S. State Department’s Advisory Committee on International Economic Policy.
Scott Klinger is Director of Revenue and Spending Policies at the Center for Effective Government. He crafted the first shareholder proposals on executive pay while working as a social investment portfolio manager. Scott is a CFA charterholder.
Research Assistance: Jessica Schieder, Center for Effective Government, and Kaela Bamberger, Institute for Policy Studies.
A Tale Of Two Retirments – Key Findings
Company-sponsored retirement assets of just 100 CEOs are equal to those of more than 40 percent of American families.
- The 100 largest CEO retirement funds are worth a combined $4.9 billion. That’s equal to the entire retirement account savings of 41 percent of American families (more than 50 million families and more than 116 million people).
- On average, the CEOs’ nest eggs are worth more than $49.3 million, enough to generate a $277,686 monthly retirement check for the rest of their lives.
- David Novak of YUM Brands had the largest retirement nest egg in the Fortune 500 in 2014, with $234 million, while hundreds of thousands of his Taco Bell, Pizza Hut, and KFC employees have no company retirement assets whatsoever. Novak transitioned from CEO to Executive Chairman in 2015.
Fortune 500 CEOs have $3.2 billion in special tax-deferred compensation accounts that are exempt from the annual contribution limits imposed on ordinary 401(k)s.
- Fortune 500 CEOs saved $78 million on their 2014 tax bills by putting $197 million more in these tax-deferred accounts than they could have if they were subject to the same rules as other workers. These special accounts grow tax-free until the executives retire and begin to withdraw the funds.
- The Fortune 500 CEOs had more in their company-sponsored deferred compensation accounts than 53.8 percent of American families had in their deferred compensation accounts.
- Glenn Renwick, CEO of The Progressive Corporation, transferred $26.2 million of his pay into his deferred compensation account last year, the most of any Fortune 500 CEO. That reduced his income tax bill by more than $10 million in 2014.
Fifteen CEOs of major federal contractors can expect to receive monthly retirement checks that are larger than President Obama’s will be.
- David Cote of Honeywell has the largest nest egg among major federal contractor CEOs, with $168 million. This will deliver him a monthly retirement check of more than $950,000—56 times larger than the $16,975 monthly check President Obama is set to receive after he leaves office.
The retirement asset gap between white male CEOs and other CEOs mirrors the racial and gender divides among ordinary Americans.
- The top 10 largest CEO retirement funds—all held by white males—add up to $1.4 billion, compared to $280 million for the 10 largest retirement funds held by female CEOs, and $196 million for the 10 largest held by CEOs who are people of color.
- The far more disturbing racial and gender gaps among lower-income Americans are even wider. For example, 62 percent of working age African-Americans and 69 percent of Latinos have no retirement savings, compared to just 37 percent of white workers.
While feathering their own nests, CEOs are increasing retirement insecurity for others.
- Last year 18 percent of private sector workers were covered by a defined benefit pension, which guarantees monthly payments, down from 35 percent in the early 1990s. In contrast, 52 percent of Fortune 500 CEOs are covered by a company-sponsored pension.
- Nearly half of all working age Americans have no access to any retirement plan at work. The median balance in a 401(k) plan at the end of 2013 was $18,433, enough to generate a monthly retirement check of $104.
- Of workers aged 50-64, 29 percent have no defined benefit pension or retirement savings in a 401(k) or IRA. These workers will be wholly dependent on Social Security, which pays an average benefit of $1,223 per month.
The retirement divide is caused by a shift in the rules to favor corporate executives over other working people. Proposals to change the rules to limit CEO retirement subsidies and instead incentivize a dignified and secure retirement for ordinary Americans:
- End unlimited tax-deferred compensation for corporate executives
- Cap tax-deferred corporate-sponsored retirement accounts at $3 million
- Eliminate tax breaks for companies that increase worker retirement insecurity
- Eliminate the “performance pay” loophole that allows unlimited corporate tax deductions for executive pay
- Prohibit large government contractors from providing executives with retirement benefits that are larger than the those of the President of the United States
- Expand Social Security benefits and require CEOs to pay their fair share
- Safeguard public pensions
- Strengthen the ability of all workers to unionize
- Support universal retirement plans
Retirement Insecurity – Introduction
This report is a “Tale of Two Retirements”: one for CEOs of large U.S. corporations and the other for the rest of us.
Executive retirement benefits are now so large they dwarf not only those of ordinary Americans, but even those of our nation’s Commander-in-Chief. These massive nest eggs are not the result of CEOs working harder or investing more wisely. They are the result of rules intentionally tipped to reward those already on the highest rungs of the ladder.
While the guaranteed monthly retirement check until death is a thing of the past for the vast majority of Americans, more than half of Fortune 500 CEOs receive company-sponsored pension plans. Their firms are allowed to deduct the cost of these often exorbitant plans from their taxes, even if they have cut worker pensions or never offered them at all.
Nearly three-quarters (73 percent) of Fortune 500 firms have also set up special tax-deferred compensation accounts for their executives. These are similar to the 401(k) plans that some Americans receive through their employers. But ordinary workers face strict limits on how much pre-tax income they can invest each year in these plans, while top executives do not. These privileged few are free to shelter unlimited amounts of compensation in these special pots, where their money can grow, tax-free, until they retire and start spending it.
The CEO-worker retirement divide turns our country’s already extreme income divide into an even wider economic chasm. New analysis by the Government Accountability Office shows that 29 percent of workers approaching retirement (aged 50-65) have neither a pension nor retirement savings in a 401(k) or Individual Retirement Account (IRA). According to a study by the Schwartz Center for Economic Policy Research at the New School, 55 percent of those aged 50-64 will be forced to rely almost solely on Social Security (which averages $1,233 a month).
Younger Americans face a particularly difficult time saving for retirement. More than half of millennials have not yet begun to save for retirement, as they lack access to good jobs, and have staggering amounts of student loan debt. Americans under 40 today have saved 7 percent less for retirement than people in that age group were able to save in 1983.
The lavish retirement packages for executives and growing retirement insecurity for the rest of us are inextricably linked. The rules now in place create powerful incentives to slash worker retirement benefits as a way of boosting corporate profits and stock prices. And since more than half of executive compensation is tied to the company’s stock price, every dollar not spent on employee retirement security is money in the CEO’s pocket.
This report ends with a series of proposals to narrow the divide by eliminating subsidies for CEOs’ golden years while ensuring a dignified retirement for other Americans.
Retirement Divide: CEOs v. the Rest of Us
On top of their massive annual compensation, CEOs of most large U.S. corporations have amassed gilded retirement fortunes. We analyzed SEC filings of publicly held Fortune 500 firms and found that the 100 largest CEO nest eggs were worth a combined $4.9 billion at the end of 2014. That sum is equal to the entire retirement account savings of 41 percent of American families (50 million families in total).
On average, the CEOs’ nest eggs are worth nearly $49.3 million. If converted to an annuity at age 65, this would be enough to generate a $277,686 monthly retirement check for the rest of their lives.
Typical Components of a CEO’s Company-Sponsored Retirement Assets
- Regular employee pension plans. A dwindling number of companies operate defined benefit retirement plans for their workforce that offer a monthly benefit after retirement. The CEO, as an employee, participates just like everyone else. The value of these retirement assets are affected by salary and tenure, and so CEOs who have worked for the same company for decades can easily have $1 million to $2 million accumulated in these plans. Nevertheless, this is usually the smallest component of their total retirement assets.
- Supplemental executive retirement plans (SERPs). These defined benefit plans are available only to a handful of executives at each firm and vary widely from company to company. Shareholder pressure has led some companies to eliminate their SERPs, but those who were already participating were grandfathered in. Among the 465 Fortune 500 CEOs for whom we have data, 252 have corporate-sponsored executive pensions. The value of their SERPs and their regular employee pensions added up to about 53 percent of their total retirement assets.
- Executive tax-deferred compensation plans. Whereas ordinary workers face limits on how much of their pre-tax pay they can set aside each year (currently $24,000 per year for employees approaching retirement) in defined contribution plans like the 401(k), CEOs face no such limits on special deferred compensation plans set up by their companies. Among Fortune 500 CEOs, we found that about 47 percent of total retirement assets are in the form of deferred compensation.
Of all the Fortune 500 CEOs for which data is available, 383 had company-sponsored retirement accounts, with an average value per CEO of $17.7 million. Among these 383 CEOs, the retirement wealth was highly concentrated. Just 31 CEOs account for nearly 40 percent of the total retirement assets of $6.8 billion. Two CEOs had retirement assets worth more than $200 million and seven had balances of more than $100 million. Eighty-two of the Fortune 500 CEOs had no company sponsored retirement assets, but all but two of these leaders have been given generous amounts of company stock that will assure them a lavish retirement. The median stock ownership among CEOs without retirement accounts is $35.6 million. (See Appendix 1 for details on all the firms)
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