The Coming Collapse Of American Retirement

“J.P. Morgan, no enemy of wealth, once said that a reasonable ratio of management pay to that of the average worker would be 20 to 1. But in the U.S. business today, it is 500 to 1,” quoth Peter F. Drucker. The 92-year-old Drucker, whom business reveres as its most respected student and thinker, did not make the remark out of admiration for managers, but disgust.

Whenever the question of disproportionate compensation for managers is broached, the increasingly vindictive editorial voices on the right start their banshee squawking about class warfare. (We should only be so lucky to have a dollop of old-fashioned class resentment in our politically supine electorate!) Class warfare doesn’t exist in the United States in any way, shape or form-just a mewling about “fairness,” a milksoppy word that reactionaries rightly jeer at. Screw fairness. Leave that to those politically correct pedants who spend their lives writing monographs about the transformation of gender roles on the Northwest frontier.

The first thing that pisses people off about the gigantic compensation awarded corporate executives is that it’s so insulting to the rest of us. In a society where you’re worth what you’re paid, it’s a slap in the face of the millions who do the necessary and indispensable work of daily life to be told, in effect, that their labor, their efforts, their accomplishments are next to worthless. The Brobdingnagian paychecks managers have gotten for themselves have created more anger as people, in the wake of the Enron disgrace, realized how the company’s managers-their guts stuffed with money not properly theirs-had left the ordinary employees face-to-face with a penurious old age. It has brought home as nothing else how mediocre, how incompetent, how antisocially selfish, how incapable so many of these overpaid rotters are. And they are scarcely the only ones. In ordinary business, on Wall Street, in sports and entertainment, there are men and women who only stand out because of the fatness of their paychecks. The millions who do their jobs better-whose jobs are often more important and necessary-look at this spectacle and ask each other, “What the hell are we?” The salaries paid to the nation’s corporate managers (I exempt from this effusion those who made their money like Bill Gates) are an insult to the worth and dignity of the millions who do the indispensable tasks and get paid literally one-hundredth to one-thousandth of what the executive-suite/private-jet bums get. People see these stories and feel as if they’d had their noses rubbed in dog poop.

The second thing that pisses people off is the haunting suspicion, reinforced by Enron, that they will have little or no retirement. The Enron collapse has been the event which has finally made many take a suspicious look at the 401(k) or defined-contribution retirement program waiting to take care of them in their old age. More or less the same thing happened at Polaroid when it went down. Polaroid not only prevented its employees from selling the company stock in their 401(k)’s, it made them buy the stuff. At the time of bankruptcy, the employees were left holding 17 percent of the company’s stock. Similar stories can be told of what happened to Global Crossing, Lucent and Kmart employees.

Wall Street and the politicians on its payroll have been telling everyone who will listen that the problem with 401(k)’s is the lack of diversity in people’s investment portfolios. Some rocks-in-the-head Democrats want to pass a law preventing people from owning more than a certain amount of stock in the company they work for. And what if the company’s stock is golden? Andrew Carnegie, no slouch in these matters, is reported to have said there is nothing wrong with putting all your eggs in one basket as long as you watch the basket. The nub here is not diversity of investments, but bad investments.

A professor at New York University, Edward N. Wolff, has been looking into how good or not so good these retirement programs are. His findings confirm the fear that Enron may be the least of our problems. He figured that the retirement wealth of the average family had dropped about 13 percent in the 15 years prior to 1998. What with the subsequent stock-market slide, there’s no reason to think that things have improved in the last three years. If you throw in Social Security and the value of the real estate the family owns and subtract the debts, on average families on or near the cusp of retirement will have 17 percent less money for their golden years than those in that age group once did.

The top 5 percent of heads of households did better. Their retirement wealth grew by a modest 176 percent. It’s surprising they haven’t gotten more, given how tax and retirement rules are built to favor them. Company contributions to 401(k)’s-usually a fixed percentage of income-will give the top dogs the same kind of 500 to 1 advantage that Mr. Drucker was complaining about. It also doesn’t hurt that the payroll tax for executives making anywhere from $2 million to $200 million is applied to 1 percent or less of their incomes.

Based on the professor’s figures, 70 percent of families could once look forward to a retirement income of half or more what they’d been making. That number is now down to 57 percent, but that’s not the whole story. Even with their Social Security checks, only a fraction of our households-just a quarter of them-will have monthly incomes over $1,000.

Let’s hope the professor is erring on the side of pessimism, but he can’t be wrong by very much. We know that the Social Security system will be going into the red in 14 years; we know that private-sector pension plans are either disappearing or going into bankruptcy. We know that a 401(k) is as much of a crap shoot as a retirement program. The only sure thing about it is the brokers’ and management fees.

On the other hand, if you’re only worth one-five-hundredth of 1 percent of the C.E.O. who took your company into bankruptcy and destroyed your retirement, what do you think you have a right to expect?