President Barack Obama speaks at a campaign event in Texas (Eric Gay/AP)The White House hit back hard late Tuesday at a study by accounting firm Ernst and Young that charged President Barack Obama's signature tax proposal could cost 710,000 jobs, claiming it's chock full of "major flaws, errors and misleading statements."
Obama has called for extending Bush-era tax cuts on income up to $250,000, a move that chiefly would benefit the middle class, while letting lower tax rates on upper brackets expire on schedule come January 1. (The richest Americans would still get tax cuts on their first $250,000 of income.) The president has said that the country cannot afford the Republican plan to extend all of the tax cuts, and warned that doing so would force cuts to popular government programs.
On the official White House blog, senior Obama economic policy aide Jason Furman ripped the new study. Among his complaints:
- The report, funded by pro-business groups generally hostile to Obama's agenda, assumes that none of the revenue generated by raising taxes on the richest Americans goes to deficit reduction. Instead, it assumes the money would go to expanding government spending. But the president has called for the money to go to reducing the federal deficit and national debt.
- The report omits Obama's push for new tax cuts to spur private-sector hiring and investment. By ignoring the predicted impact on jobs growth, Furman argued, the study distorts the impact of the president's agenda.
Furman, whose title is Principal Deputy Director of the National Economic Council, also charged that the study's conclusions are "dramatically out-of-line with estimates by other analysts" like the Congressional Budget Office (CBO), the non-partisan standard for judging the economic impact of federal legislation. And he underlines that Obama's tax proposal would let rates climb back to where they were under President Bill Clinton — when the economy created millions of jobs.
DES MOINES, Iowa – Sometimes it pays to get help. A new study of 401(k) accounts provides further evidence that workers who get help pocket higher returns than those handling their own investment choices.
The study by human resources consultant Aon Hewitt and investment adviser Financial Engines shows that workers who received some form of help experienced annual returns on average of 3 percent better than workers who handled their own accounts.
But it's important to clarify what's meant by "help." Workers who used target-date mutual funds, professionally managed accounts or accessed online advice were all deemed to have used help for purposes of this study. Their behavior from 2006 through 2010, and how it affected account risks and returns, was studied.
Target-date funds automatically set the mix of stocks and bonds according to a worker's risk tolerance and years until retirement. Managed accounts are those with professional manager so the accountholder doesn't have to make ongoing investment decisions.
Based on the returns estimated in the study, the difference that 3 percent could make over 20 years is striking. If two accountholders — one who sought help and one who did not — invested $10,000 at age 45, the person who got help could have $71,400 saved by age 65. That's 70 percent more than $42,100 of the worker who handled their own affairs.
The study looked at eight large 401(k) plans representing more than 425,000 individual participants with $25 billion in assets.
It should be noted that Financial Engines' services include managed accounts and advice services. Aon Hewitt offers companies retirement plan options including self-directed brokerage accounts and financial planning help services.
The difference in performance can be attributed to common mistakes made by 401(k) accountholders managing their own investments.
GETTING OUT
Getting scared and pulling money out of stocks when the market tumbles, and then failing to reinvest before the market recovers hurts many retirement investors. This behavior was very damaging in 2008, when the Standard & Poor's 500 index fell nearly 39 percent. Unfortunately many stayed out and missed the 26 percent recovery in 2009.
"When markets are as volatile as they are now there is a substantial opportunity to make some very bad mistakes," said Christopher Jones, chief investment officer for Financial Engines. "Particularly if you're a near retiree. That can be very damaging."
TOO MUCH OR TOO LITTLE RISK
Choosing an inappropriate level of risk for a worker's age and years until retirement is another common error. Leading up to the market collapse in 2008, many workers within five years of retirement carried too much risk, keeping a large portion of their money in stocks. When the market dropped, on average, 401(k) investors lost a third of their account balance. Those who were close to their planned retirement didn't have time to make up the losses and in many cases had to continue working.
Younger workers who are too cautious and shy away from stocks can cut their earning potential significantly over time.
COMPANY STOCK
Another common costly mistake is investing too much money in the employer's company stock, Jones said. Many workers believed their own company stock was less risky than other choices. When the market plunged in 2008, many of these stocks fell as much as 70 percent. This led to a devastating loss for heavily invested workers.
REBALANCING
Failure to periodically rebalance a portfolio can also hurt returns. By rebalancing, investors adjust the allocation between stocks and bonds in their portfolios to ensure their investments reflect their appetite for risk. For instance, in a market where stocks surge, a portfolio can become too heavily invested in stocks unless the accountholder moves some of that money from stock funds into bonds or other assets.
Failure to rebalance after a market surge or drop leaves a portfolio at risk to underperform.
COMPLACENCY
A large segment of 401(k) accountholders have historically been complacent about their investments, failing to do anything with their account for years.
"Rather than do something wrong they're just not doing anything," said Pamela Hess, director of retirement research at Aon Hewitt. "With all the volatility in the last few years, I think folks don't know what to do and a lot are just doing nothing."
More workers with 401(k) accounts are using some form of help, Hess said. An earlier study of 401(k) accounts indicated about 25 percent of workers used help with their investments in 2009. As of the end of 2010, about 30 percent of workers were using help.
Hess points out it, however, that still means about 70 percent of workers don't get help.
"This study really quantifies the fact that he gap between doing things on your own and what you can get with professional help does in fact get substantially wider during periods of volatility and economic stress," Jones said.
While acknowledging that some forms of help including managed accounts carry higher costs, Jones said the difference in performance outweighs the increased cost.
Managed account fees typically range from 0.20 percent to more than 1 percent of the account balance. Target-date fund fees can range from around 0.18 percent to more than 1.5 percent of assets.
WASHINGTON (Reuters) – Twenty-five of the 100 highest paid U.S. CEOs earned more last year than their companies paid in federal income tax, a pay study said on Wednesday.
It also found many of the companies spent more on lobbying than they did on taxes.
At a time when lawmakers are facing tough choices in a quest to slash the national debt, the report from the Institute for Policy Studies (IPS), a left-leaning Washington think tank, quickly hit a nerve.
After reading it, Democratic Representative Elijah Cummings, ranking member of the Committee on Oversight and Government Reform, called for hearings on executive compensation.
In a letter to that committee's chairman, Republican Darrell Issa, Cummings asked "to examine the extent to which the problems in CEO compensation that led to the economic crisis continue to exist today."
He also asked "why CEO pay and corporate profits are skyrocketing while worker pay stagnates and unemployment remains unacceptably high," and "the extent to which our tax code may be encouraging these growing disparities."
In putting together its study, IPS chose to compare CEO pay to current U.S. taxes paid, excluding foreign and state and local taxes that may have been paid, as well as deferred taxes which can often be far larger than current taxes paid.
The group's rationale was that deferred taxes may or may not be paid, and that current U.S. taxes paid are the closest approximation in public documents to what companies may have actually written a check for last year.
$16.7 MILLION AVERAGE
Compensation for the 25 CEOs with pay surpassing corporate taxes averaged $16.7 million, according to the study, compared to a $10.8 million average for S&P 500 CEOs. Among the companies topping the IPS list:
* eBay whose CEO John Donahoe made $12.4 million, but which reported a $131 million refund on its 2010 current U.S. taxes.
* Boeing, which paid CEO Jim McNerney $13.8 million, sent in $13 million in federal income taxes, and spent $20.8 million on lobbying and campaign spending
* General Electric where CEO Jeff Immelt earned $15.2 million in 2010, while the company got a $3.3 billion federal refund and invested $41.8 million in its own lobbying and political campaigns.
Though the companies come from different industries, their tax breaks fall into two primary areas.
Two-thirds of the firms studied kept their taxes low by utilizing offshore subsidiaries in tax havens such as Bermuda, Singapore and Luxembourg. The remaining companies benefited from accelerated depreciation.
Shareholders have responded favorably when companies in which they invest keep a tax bill low through legal methods, thereby benefiting earnings. But Chuck Collins, an IPS senior scholar and co-author of the report, said that is a mistake.
"I think it's an exposure of weakness in a company if their profitability is dependent on their accounting department and not on making better widgets," he said.
In prior reports, Collins said, out-sized CEO pay was often a red flag of bigger problems to come. The IPS has been putting a pay report together for 18 years. Among those whose leaders have made the high pay list in years past, only to have their businesses falter: Tyco, Enron and WorldCom.
(Reporting by Nanette Byrnes; Editing by Howard Goller and Todd Eastham)
(The following story was corrected to show Boeing paid CEO Jim McNerney $13.8 million, not billion)
