Opinion

Inequality looms in our retirement accounts

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.

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."

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 the median 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, “A Tale of Two Retirements,” 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.

Barry Ritholtz, a Bloomberg View columnist, is the founder of Ritholtz Wealth Management. He is a consultant at and former chief executive officer for FusionIQ, a quantitative research firm.

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