Editor's pick: Originally published Dec. 22.
In the U.S., 100 executives have more in their collective retirement accounts than the combined savings of the bottom 41% of all wage earners. With a whopping $4.7 billion in assets, that's enough for these CEOs to sail off into the sunset on an average retirement check of $253,088 per month every month for the rest of their lives.
The median worker has enough put away to retire on $101 per month.
These are the results of "A Tale of Two Retirements," a research paper put out recently by the Institute for Policy Studies, a self-identified progressive think tank that researches economic and social issues such as inequality. Authors Sarah Anderson and Scott Klinger do an efficient job of mapping out just how thoroughly America's inequality crisis has reached into retirement.
And it is a worrying indictment, with the report citing troubling facts:
- Out of current 56- to 61-year-old workers, 39% anticipate depending entirely on Social Security's average $1,239 per month
- That original collection of 100 CEOs have more in retirement assets than 75% of all Latino families put together, and
- Many executives have seen their retirement accounts increase by 200 to 650% over the past six years alone.
By now, according to Anderson, the retirement gap dwarfs the income gap.
"We started doing this analysis of the top 100 CEOs versus ordinary Americans last year, because we wanted to add another dimension to the inequality debate that is often overlooked," she said. "And we aim to show in this report that this is not the result of extraordinary performance at the CEO level, but rather the result of policy shifts that have favored top executives."
As with many aspects of inequality, the widening gulf in retirement is often the product of well-intentioned policies taken to unintended extremes. In this case, as Anderson noted, many of the rules which designed to incentivize executive performance can also be used to game retirement savings.
Of particular note are stock options and tax-deferred compensation, two standard mechanisms of C-suite retirement planning.
Stock options allow CEOs to gild their retirements through the lower tax rates paid on dividend income. Since investments (such as corporate stock) are taxed at a maximum rate of 20%, when an executive cashes out her options, she collects delayed income at a considerable tax advantage.
Tax-deferred compensation plans are somewhat more complicated, but ultimately similar to 401k(s) without the contribution limit.
Under deferred compensation plans, an executive elects not to receive a certain portion of his income for the coming year, instead allowing the company to keep (and typically invest) it. In this sense, it's similar to a 401(k) plan, because the advantage is that the executive doesn't pay any income tax until he collects the money in retirement, allowing it to grow tax-free.
The idea is to create a system where executives can build a sufficient retirement account, since the $24,000 401k cap would be insufficient for most c-suite workers to meet the standard goal of replacing 80 - 90 percent of working income.
However as inequality has grown more extreme, and given low investment tax rates, the reality of deferred compensation has grown to look more like a vast giveaway than a mechanism for incentive-based pay.
"CEO pensions have gotten larger because CEO paychecks have gotten larger," Anderson said, "and these executives have been stuffing more of their compensation in these tax-deferred accounts. So there's a direct connection to income inequality. And so retirement policies play a role, but it's probably not as big as the bigger income gaps."
Yet as much as this is a story about the wealth of a few, it's an equally important story about the needs of many.
This issue wouldn't be nearly so urgent if it weren't for the fact that millions of Americans struggle to put together an adequate retirement plan of their own. It's a story rooted in slipping incomes amid growing costs, and among Millennials, the increasing role of student loans in personal finances.
Yet for all the structural causes, individuals may not have to wait for a structural fix. At least, that's the opinion of Michael Liersch, head of behavioral finance with Merrill Lynch.
Start small, he suggests
"You need to truly define what you think money should be used for in your life," he said. "What I mean by that is, you have to identify some sort of principle or guiding values that determine your behaviors even in the absence of formal rules or being monitored by a financial plan. It almost has to be something intrinsic to who you are."
The reward may be the virtuous equivalent of living beyond one's means: retiring beyond one's means.
Although many Americans feel their retirements growing increasingly precarious, Liersch believes that most people can actually begin to buffer against that, even those on limited incomes.
Start, he suggested, by focusing on intentionality. Instead of paying bills as they come and then seeing what's left, take stock of your assets and expenses and decide what you intend to do and what it will take to get there.
Then look at how important everything else seems in that context.
"[It] may require a what we call in finance terms a 'reframe,'" he said. "In order to get people in the mindset of being able to live above their means someday, sometimes it's important to be able to give them reference points to other people's lifestyles."
"A comment we often make to our wealthy clients is that 80% of human beings live on less than $10 a day," he adds. "When you think about it in that kind of framing, there's an extraordinary opportunity for people of many different incomes."
When researchers like Anderson find that the wealth of a handful outmatches that of millions, that's an important statistic. Yet while wondering at the nine-figure retirement accounts it's also important to remember how sparse the savings truly are on the other end of the spectrum.
This is a problem that needs policy fixes that address structural issues of income stagnation and inequality, but that doesn't mean the situation is hopeless for the average worker. In fact, there's a lot they can do to start catching up today. Even a few extra dollars a month at age 30 or 35 can add up by the time retirement hits decades later.
For those worried about how to stack up to the CEO fortunes, that's probably the best place to start.
"When I look at a lot of the information out there it suggests that you have to make big, huge changes in what you're doing in order to make it work," Liersch said. "I think that in many cases can be extremely demotivating. You just throw up your hands."
"[Instead] I always start with, what are you getting, what are you investing in?" Liersch added. "That can get us to things that people are more excited about."