Wednesday, November 4, 2015

Retirement Inequality in America

When we think of income inequality in North America and Europe, we often associate the massive differential between executive salaries, particularly those at the top of the corporate heap, and the relatively tiny compensation that is paid to an average worker as a guide to the degree of income inequality in our society today.  What is rarely considered is how income will look after retirement for both groups.  Fortunately, a recent study by the Center for Effective Government and the Institute for Policy Studies examines the vast differential in retirement benefits between the two groups.

Let's start with a few facts:

1.) The 100 biggest retirement funds set aside for CEOs are worth a total of $4.9 billion, equal to the retirement savings of 50 million American families (which represents 41 percent of all American families) or 116 million Americans.  Here is a table showing the ten largest CEO retirement funds:

2.) The largest retirement fund in the Fortune 500 is held by David Novak, CEO/Executive Chairman of YUM Brands, the owner of Taco Bell, Pizza Hut and KFC and is worth $234 million.   This will generate a monthly income cheque of $1.3 million upon his retirement.   It is key to note that hundreds of thousands of his employees have no company-sponsored retirement plans.  Those 8828 employees that do have account balances in a 401(k) have an average value of $70,167 and will generate $395 per month in retirement income.  

3.) On average, the value of these CEO retirement plans are worth more than $49.3 million, a size that is large enough to generate a monthly income cheque of $277,686, equivalent to roughly five times the annual income of an American family unit.

4.) Tax deferment works in the favour of these CEOs; Fortune 500 CEOs have saved $78 million on their 2014 tax bills alone by putting an additional $197 million into these tax-deferred compensation accounts than they could have if they were under the same tax regulations as the "sweaty masses".  Here is a table showing the ten largest CEO Deferred Compensation Accounts:

In 2014, the largest deferred compensation contribution belonged to Glenn Renwick, CEO of the Progressive Corporation, who invested $26.2 million in his tax-deferred compensation account which saved him more than $10 million in federal taxes.
5.) Only 18 percent of private sector workers had a defined benefit pension, a drop of nearly 50 percent from the 35 percent level seen in 1990.  On the other side of the coin, 52 percent of Fortune 500 CEOs have a company-sponsored retirement plan.  As well, nearly 75 percent of Fortune 500 companies have set up tax-deferred compensation plans for their executives that are similar to 401(k) plans that ordinary workers have access to.  The biggest difference is that there is a limit to how much pre-tax income ordinary workers can contribute to their 401(k)s (workers 50 years of age and older can contribute $24,000 annually); in the case of executive compensation plans, there is no limit which allows them to shelter unlimited amounts in these plans tax-free.

With this information in mind, I find it particularly galling that many American corporations have minimized their pension liabilities by converting defined benefit pension plans to defined contribution plans.  By doing this, companies shield themselves and it is the working class who bears the burden of saving sufficient cash to provide themselves with a financially secure retirement.  While defined benefit plans were the norm in the 1980s and 1990s, by 2011, three times as many private section workers had a defined contribution pension plan when compared to those that had a traditional defined benefit pension plan as show on this graphic:

In closing, let's summarize this posting by looking at the pension status and pension funding levels of the ten corporations with the largest CEO retirement accounts that we observed on the first table:

With millions of baby boomers wondering how they are going to make ends meet after they retire (if indeed they can afford to retire), it's comforting to know that a few hundred Americans are going to have no retirement worries whatsoever.


  1. The things oligarchs get away with. "On average, the value of these CEO retirement plans are worth more than $49.3 million, a size that is large enough to generate a monthly income cheque of $277,686, equivalent to roughly five times the annual income of an American family unit." That is simply insane that after being grossly over paid during their time as CEO that collect that amount of money after they retire. I honestly didn't think CEO types had retirement funds. I figured they were being paid millions and it was up to them to set aside part of the money for retirement. Wow is all I can say.

  2. Good post.

    I think one of the greatest swindles of the American worker happened under the Reagan Administration (surprise) when the burden or providing for retirement was shifted from American business to the American worker via 401K's

    I still remember the claims that were made to this day. Invest $1000 and retire with $100,000 (which was a serious chunk of change back then) Even now I remember thinking "IF the stock market continues to perform".

    Unfortunately shifting the retirement burden from business to worker didn't come with a requirement that businesses actually pay workers enough to save for their retirement. Second it should have been obvious at the time (and probably was) that Wall Street would structure these funds to pay Wall Street more than the retiree. The fees for these funds can eat up greater than 50% of your gain. As Jack Bogle, the founder of Vanguard explains it, "What happens in the fund business is the magic of compound returns is overwhelmed by the tyranny of compound costs." There are many more problems with IRA's than are possible to discuss here.

    What few people realize is that they don't own their 401K, the government does. Read the fine print and you will find "FBO" (For Benefit Of). The tax code makes it technically owned by the government, but provided for your benefit. This is bad because it allows the government to legally take your retirement funds to fund government priorities. This happened in Argentina in 2008, Hungary in 2010, Ireland in 2011 and also in Poland and France. Don't think it could happen here in the good ol' US of A? Think again. During the Great Recession Congress invited an expert give testimony on confiscating 401Ks and turning them into a public retirement plan like SS.

    To be fair, there may be a certain logic in taking retirement funds out of the hands of the idiot savants that run Wall Street, but it still galls to think that these funds could be so grossly mismanaged by the "private sector" that it would make it necessary for the government to seize them both to protect them and provide funding to run government operations.