Retirement Inequality

In the Republican presidential debate Wednesday night, the issue of income inequality came up with surprising frequency. Why that happened is worthy of its own column; for now, let’s explore the issue with some recent data. Specifically, I want to consider inequality in the funding of our collective retirements.

As a nation, we do a rather mediocre job preparing for the day we stop working. We underfund Social Security, a program originally developed to combat poverty among older Americans. As individuals, we fail to save enough to fund our own secure retirements.erica’s Retiremnt Gap

To go deeper on the topic, let me direct your attention to Charley Ellis, founder of Greenwich Associates and former chairman of the Yale endowment. Ellis wrote the seminal investment book “Winning the Losers Game.” More recently, he co-wrote a sober explanatory book, including reasonable solutions, titled “Falling Short: The Coming Retirement Crisis and What to Do About It.” You can listen to our Masters in Business interview with Ellis here.

In the meantime, consider this analysis by the Schwartz Center for Economic Policy Analysis at the New School for Social Research in New York. Using the most recent Census Bureau data, their analysis observed that “almost half of U.S. workers didn’t have a company-sponsored retirement plan in 2013, compared with 39 percent in 1999.”

As Bloomberg News reported, “The lack of plans is fueling a retirement-savings crisis. Few workers save anything outside of employer-sponsored plans. Only 8 percent of taxpayers eligible to set aside money in an IRA or Roth IRA did so in 2010, according to the IRS.” Those statistics are simply awful.

Forget for a moment the debate as to whether Social Security will be around (it’s easily made solvent). At present, Social Security benefits average $15,700 a year, far below what most people need to replace themedian U.S. salary of $53,657.

Then consider:

• Half of U.S. workers lack company-sponsored retirement plans.
• Only 45 percent of businesses with fewer than 100 employees offer 401(k)s.
• Those who work part time, or switch jobs frequently, or work at a small company, are less likely to have an employer-sponsored retirement plan.

It’s not just that the U.S. retirement situation is bad — it’s that it’s trending in the wrong direction.

At the opposite end of the spectrum are the retirement plans of chief executives. As a group, not surprisingly, they are doing exceedingly well. As Bloomberg reported Wednesday, “The retirement savings accumulated by just 100 chief executives are equal to the entire retirement accounts of 41 percent of U.S. families — or more than 116 million people.” The 100 largest chief executive retirement funds are worth an average of $49.3 million per executive, or a combined $4.9 billion. All of these data points come from a new study by the Institute for Policy Studies and the Center for Effective Government.

Some of the data points are quite astonishing: “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.” The CEOs managed to “save $78 million on their 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.”

Why well-paid executives get a better tax deal than rank-and-file workers is not much of a surprise: They are the ones who can afford the lobbyists who insert these special dispensations into the tax code.

So while we are debating income inequality, we should also be thinking about retirement inequality.

Perhaps most vulnerable are the millennials, who came of working age in the midst of the Great Recession. There are 68 million wage-and-salary workers without a company-sponsored retirement plan, according to the Employee Benefit Research Institute. Millennials make up a disproportionate share of workers without a 401(k).

This is unfortunate: Patrick O’Shaugnessy noted in his book “Millennial Money: How Young Investors Can Build a Fortune,” that as investors, millennials are planning for retirement in 40 to 50 years. Never again in their lifetimes will they have such a long time horizon.

We have a looming retirement crisis. I have yet to hear a coherent solution from anyone from either party.


Published asInequality in Our Retirement Accounts




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  1. rd commented on Oct 29

    “We have a looming retirement crisis. I have yet to hear a coherent solution from anyone from either party.”

    Therein lies the crux of the problem. First, you have to believe there is a retirement crisis, before you have to even think about a solution. The people most impacted are not engaged in the political process and therefore there is no crisis for the congressmen to respond to.

    • VennData commented on Oct 29

      Enough with the gotcha comments. Tax cuts will fix anything. Everything.

    • intlacct commented on Oct 30

      But they are engaged. They are just consistently voting against their self-interest. It’s called masochism.

    • KDawg commented on Oct 30

      +100 on this comment.

      I just perused the comments on the Bloomberg article and nearly vomited in disgust. I know I’m dealing with Internet comments here, but the views aren’t far off from many of my coworkers’ views. Essentially, the mentality is, “I deserve to retire and you don’t, because I’m oh so responsible and talented because I have done X, Y or Z.”

      When the stock market crashed, many of these oh so responsible people that I knew liquidated near the bottom. I have to give them credit though. They haven’t changed their tune except to resent people like me for new reasons. I didn’t sell and therefore am not a slave to my employer since retirement appears to be around the corner for me. See, I don’t deserve to retire, because I criticized the system they thought they knew. I’m some kind of hypocrite for actually knowing more about the system they fetishized and actually getting the promised results (so far anyway – fingers crossed).

      I still support a national pension system even though it doesn’t look like I personally need it. I’m not interested in maintaining the punishment society we have today. Providing a government pension system that works is simply a matter of proper taxation and actuary work. Individual retirement accounts are just plain stupid for retirees. I assume most homeowners buy homeowner insurance. How exactly does that insurance work? Pooled risk? Actuary work? If you support individual accounts as the mainstay for retirement, why not drop your homeowner insurance? There’s less risk of your house burning down than the risk of you not growing your retirement investments enough.

  2. rd commented on Oct 29

    My biggest single beef with the retirement and Social Security discussions is when they start trotting out the 75-year projections of trillion dollar shortfalls. Who believes anything at all in a 75-year projection (75 years ago is 1940, SS was just invented, the US had not entered into WW II, the Cold War didn’t exist, and the Baby Boom hadn’t even been thought of).

    We need to be focusing on the 10-year and 30-year projections and addressing shorfalls in those. Those actually have realistic demographic structures since most of the people involved on the pay-in and pay-out ends have actually been born. However, that gets in the way of the people whose goal is to eliminate or strip these programs that are doing massive good in preventing elderly poverty. That in turn helps the economy today, as people are more willing to spend and consume.


    Admin: Heritage foundation is full of bullshit

    • rd commented on Oct 29

      That’s why I posted their post that starts with the 75 year projection, which is essentially meaningless.

    • Gnatman commented on Oct 30

      By law, the 75 year projection should be cut down to the current requirement to pay only at a sustainable rate. Thus, when deposits are not enough to pay full benefits – annuities get cut.

  3. marketmap commented on Oct 29

    A 70+ aged retiree may be stuck. Yet, if a boomer aged retiree is “behind” on their asset accumulation, they can steepen the trajectory of their asset growth by investing in the equity markets using simple, low turnover tactical allocation and risk mitigation strategies ( ala algorithmic modeling research used by some of the great hedge funds ). They can make the transactions themselves in low cost brokerage accounts and save on erosive management fees and expenses.

    • DeDude commented on Oct 29

      If you had decided to invest more in equities in late 2007 because you were behind and then lost your job in the crisis in early 2009, and within 1-2 years were forced to begin early retirement because you could not find a job – you would be in over your head. Taking on additional risk at an age where you might be forced to retire early (55+) if the economy goes south, is a very bad idea. At that age return of becomes even more important than return on investments.

  4. RW commented on Oct 29

    Willful ignorance is an excellent means of confirming bias while denying need for action: If a problem or population doesn’t exist then it is possible to tolerate or even promote policies that might otherwise be viewed as dangerous, inhumane or vile. We seem to be seeing a fair bit of that these days and the growing retirement catastrophe is only one case in point; e.g.,

    The Republican Party’s Strategy to Ignore Poverty
    Arizona …in July became the first state to cut poor families’ access to welfare assistance to a maximum of 12 months over a lifetime. That’s a fifth of the time allowed under federal law, and means that 5,000 more people will lose their benefits by next June.

    This is only the latest tightening of the screws in Arizona. Last year, about 29,000 poor families received benefits under the Temporary Assistance for Needy Families program, 16,000 fewer than in 2005. In 2009, in the middle of the worst economic downturn since the Depression of the 1930s, benefits were cut by 20 percent.

    And if Paul Ryan …speaker of the House, has his way, poor people in many other states can expect similar treatment in the years ahead. A bit of history is necessary to understand how we reached this point. …

  5. Iamthe50percent commented on Oct 29

    I’ve heard a solution. it was W’s suggestion to turn SS into a giant IRA. That would solve the government’s problem and was consistent with the GOP’s philosophy of “Hey! If you weren’t born rich, too bad!”

  6. Concerned Neighbour commented on Oct 29

    It’s unrealistic to expect a quick fix for any problem that was decades in the making. I don’t see any feasible solution to this problem for the next generation to retire, at least in this political climate.

    Longer term, the solution is likely higher mandatory contributions to social security, along with more “nudges” to encourage people to save more on their own. I think employer sponsored plans will grow less common as work continues to get more precarious/short-term in nature.

    • DeDude commented on Oct 29

      Considering the number of people who do not take full advantage of their company 401K match, I think “nudges” will fail. We need to do something mandatory to avoid that a large fraction of the population will live in poverty when they get old enough to get kicked out of their job. I think your suggestion of improving social security is what will work.

  7. pekoe commented on Oct 29

    As a nation, our thinking about retirement savings suffers from the failure to recognize the Thrift Paradox. We are told that if we save enough money that everything will be OK. Our saved money when we are retired only serves to motivate current workers to make us goods and services that they will share with us in exchange for magic paper money. You cannot eat paper money, and you cannot save bread to eat in your retirement. It does not really matter how much one generation saves compared the next because all goods and services must be provided by current workers to current retirees. As a society, saving money in advance only really helps if it is invested in a way that increases the future supply of goods and services. If that money is not properly invested and is either stuffed under the mattress or even better evaporated in a financial crisis, then all those savings IMPEDE future retirement by decreasing economic growth. If productive investment is NOT done, saving money in advance is only a mechanism to bigger-thy-other-retired-neighbor, by out competing with magic paper money for the available supply of goods and services from current workers. Importantly, if investment in increased supply of goods and services is not made, then “reforming social security” is just a mechanism for deciding whom to screw.

    You did not hear this in the Republican Debate last night.

    • Iamthe50percent commented on Oct 30

      Applause for a man who remembers taking Economics in school!

  8. Futuredome commented on Oct 29

    The question of how the “retirement crisis” develops, if at all is very very key. It may just take higher contributions in SS. Maybe the coming of the echo’s over the next 20 years will soften the blow.

    Politicians want to confiscate SS for their own devices.

  9. DeDude commented on Oct 29

    A mandatory addition of 2% to both employee and employer SS contributions, would be a good start. However, the problem with traditional SS as a retirement system is that the money is invested 100% in safe bonds so the returns are not that great. The 2+2% supplemental social security should be placed in age bracket appropriate target date funds with appropriate mixes of different types of investments.

    • bigsteve commented on Oct 29

      I read somewhere that Barry Goldwater wanted to privatized Social Security and have it in the Stock market. He changed his mind when someone pointed out how huge the Social Security Trust fund really was and would of socialize our economy as most ownership would of been the government. We really have to be careful of unintended consequences.

    • DeDude commented on Oct 30

      You definitely want all the money placed in index funds and nothing as actively managed investments. At this time the draw down of baby boomers retirement investments would blunt the effects of placing more money into stocks.

  10. 4whatitsworth commented on Oct 29

    Someone should check my math but lets say I made the minimum wage in 1975 of 2.00 hr about 10,000 a year. My imposed social security contribution would be 1,500/ year 750 from me and 750 from my employer. If this were invested with a 7% return and my earnings increased with inflation to say 7.25 (I would hope for more). After 40 years of work years I could draw at least $16,000 a year in retirement.

    Now if the government took my money and spent it on their retirement and benefits (in the name of safety and trust) and gave me a 2% return that would create the situation we are in now. Then if there were millions of people who erroneously claimed disability and the government had to raise taxes to say 18% of GDP to pay the debt and bail social security out. That would slow the economy and the next generation would never get that 7% return. There we have it one dead golden goose! – Yes we can.

    • rd commented on Oct 29

      The 2% bond yields are just recent. Since the early 80s, bonds have done almost as well as stocks with much less volatility.

    • kaleberg commented on Oct 29

      $10,000 a year at $2/hour is about 5,000 hours a year or 12+ hours a day, 365 days a year. (There are fewer than 9,000 hours in a year.) Be more realistic. $2/hour would be about $4,000 a year. If you could get the hours, a long shot, you might get $5,000 to $6,000 but not every year. Your SS contribution would be a lot smaller, maybe $300-$450 a year.

      Also, 7% return over any length of time is rather far fetched. Most mutual funds don’t even come close, and they are run by professionals with all sorts of advantages. Even after fees, you’d expect a few firms to average 5%, but maybe only a handful do. If you don’t adjust for inflation, at age 65 a 7% return would get you a nest egg of $122,000 in 1975 dollars, or about $540,000 today. A more realistic 5% would get you $67,000 or about $300,000. If you were unlucky, or bought a typical mutual fund, you’d probably get 3% and wind up with $168,000.

      I had a friend who paid for law school by winning medium size stakes ($5-$20K) in the state lottery. Hey, it worked for her. You are 20 years old. How good an investor are you? Go to a mutual funds selection site and try and find a fund with a long term 5% return. Now, did you choose the right one? Remember, we’re talking 40+ years into the future. Choose wrong and you’re off by a factor of three, and remember, even highly trained, well paid mutual fund operators can’t guarantee a return. You are betting that you are smarter than all but a handful of them. Oh, you are. Maybe you should start your own fund.


      If the government raised taxes and gave the money to moochers who couldn’t lift heavy boxes anymore, then there would be no drag on the economy. The problem comes when money isn’t being spent, like when it is is given to people who are already wealthy who would use it to buy symbolic goods, rather than poor folks who would waste it buying goods and services. Picasso is dead. Bidding up the price of one of his paintings does less for future generations than buying a pack of condoms and a bottle of bourbon.

    • 4whatitsworth commented on Oct 30

      Thanks for the check! You are correct my calc would have been starting at $5/hr.

      As far as returns go the S&P 500 index is as simple as it gets for an investment. Here is a cool web site with historical returns Since 1970 the return has been 7.3% if you count dividends its 10%. So I still think that at minimum wage $2 hr even starting at 4,000 year if my social security were invested in the S&P 500. I could probably retire by funding my own social security scheme and working for minimum wage.

      As far as the debate as to if social security is a welfare program or a forced pension system. I have tried to find information on the origins of social security and have never found any absolutely clear information there. I think that most working people see it as a pension system and insurance.

    • DeDude commented on Oct 30

      You cannot really look for “return on investment” on social security, because it is poverty (and disability) insurance, not a retirement program. It will not just keep you but also your spouse and children out of poverty in case of your death. The problem is that way to many people think social security is a retirement program and, therefore, fail to save in a real retirement program.

  11. LiberTea commented on Oct 29

    If a person expects to spend a third of adult life in retirement, he might consider putting aside one third of what he makes every year as he goes, invested, to cover the needs later in life.
    Lifestyle might be adjusted along the way to make planning for the end of life tactically possible year by year.
    Having a high lifestyle along the way and expecting the government to take care of you in the end is a precarious strategy.

    • wisconjon commented on Oct 30

      If we spend a third of our life in retirement, and half our life working, then we should save 5/6 of our income to ensure we have 1/3 of our required return by the time we reach the last 2-3 years of our life with an average lifespan of 95. Add to that, if we take that number and divide it by 7, then it becomes normal again when compared to the high-flying number of 15. So by your math, we can fix this process by pulling numbers out of our darkness to solve this problem.

      The only way to solve any issue with elderly poverty is to fix SS, which is intended to keep old people out of poverty. All other discussions of wealth above and beyond SS are icing on the cake.

    • LiberTea commented on Oct 30

      I’d like to see your cakes.
      SS is sposta BE the icing.

  12. Lyle commented on Oct 29

    The question of the return on social security is not clear because the return in terms of old age pension depends on if you are married and if you have kids under 18 when you start benefits. In both cases they get their own benefits. Further if you look at the benefit formula you find it works like this. Take the wage rate adjusted monthly wage over the top 35 years. Then replace 90% of the first 846 a month, 32 percent then replace 32% up to an average wage of 5156 and 15% up to the limit. So Social security already has elements of a welfare program, both in terms of the benefit and the spouse child benefit. (Note that the spouse benefit really only applies if the spouse has less than in the neighborhood of $2500 a month income, beyond that the workers own benefit is higher).
    All regular investment type products tend to be some amount times some percentage.

  13. intlacct commented on Oct 30

    “At present, Social Security benefits average $15,700 a year, far below what most people need to replace the median U.S. salary of $53,657.”

    Flawed comparison…

    1. Why do people need to live in more expensive areas when they don’t have a job?
    2. Why do they need that income when they have a fraction of the housing costs assuming their home is paid for)?
    3. Why do they need that when most of their tax burden disappears almost entirely?
    4. Why do they need that when most of their retirement saving burden disappears almost entirely?
    5. Why do they need that when most of their child care/education disappears almost entirely?

    Inquiring minds want to know. ;)

    • DeDude commented on Oct 30

      The rule of 80% for a comfortable retirement is assuming reduced housing (mortgage) cost as well as reduced cost for car use (repair, replacement, gas). But also increased travel/entertainment cost and drastically increased medical costs. This clearly is just an average and can differ substantially in either direction depending on individual circumstances. Some people who had large mortgages, long commutes, and no interest in travel will be fine with 50%, others may be tight on 80%.

      The one thing that surprise and get a lot of people in trouble is the medical expenses as you get older. It is not uncommon for people to find that their health deteriorate and medical expenses take the majority of their social security check every month. Then they end up either choosing to eat dog food or to cut their pills in half (or not take them at all and end up in the hospital).

    • Iamthe50percent commented on Oct 30

      1. Those expensive areas are where they lived their whole lives and have the best medical facilities. So you advocate moving to Appalachia or Watts?
      2. That’s a big assumption. And they still have huge property taxes. I know blue collar workers who are paying $10,000 to $15,000 yearly for property tax alone. Basically everyone in Illinois that doesn’t live in Cook County.
      3. See #2. Most of their tax burden was state and local taxes that continue. Even the SS is subject to income tax.
      4. What “burden”? 6.2% SS tax and 6% 401K contribution? Hardly a “burden”.
      5. Care of grandchildren, unemployed children. MONSTROUS prescription drug bills. For today’s generation they will probably still be paying off their student loans.

      Maybe your mind can inquire about how well YOU would live on $1100 a month (less Medicare premiums).

      And why do you NEED a fancy car and silk suits and restaurant meals? God! I’d hate to be your parent or kid.

  14. DTouche commented on Oct 30

    The government should backstop SS and other benefits the same way they found a way to backstop the banks during the financial crisis.

    Large liabilities such as SS, Medicare create deep holes that can be filled with printed money without exporting significant inflation to the rest of the economy.

    I look forward to your thoughts.

    P.S. Such techniques could be used to redistribute wealth without changing tax code or rates. Why should taxes be raised when the goverment could handle redistribution and avoid pushback from the usual suspects?

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