Duncan Brown: A chilling tale of shifting fortunes

The ‘up/down’ contradictions of our current economic situation continue.

The eurozone’s third quarter of double-dip recession and disappointing UK industrial output figures were accompanied by news of 13% growth at luxury brand Burberry and record sales at Rolls-Royce.

Who stole the American Dream? by Pulitzer prize-winning journalist Hedrick Smith, published last year, charts US economic history since the Second World War. Smith shows how, from a reward and benefits perspective, it has very much been ‘up’ for those already at the top of the income ladder and ‘down’ for those at the bottom. Or, in fact, for all those beneath the top. The era of middle-class prosperity in the 1950s and 1960s has morphed into the polarised politics and starkly unequal autocracy of today.

From 1945 to 1973, the productivity of US workers rose by 96% and average hourly compensation rose by 94%. The period 1973 to 2011 saw similar productivity gains of 80%, yet average compensation rose by only 10%.

Smith sees the obscure paragraph 401(k) inserted into the tax code in 1978 and the easing of US bankruptcy laws as pivotal in the shift. Millions of US workers adopted do-it-yourself retirement plans, and their share of pension costs went up from 11% in 1980 to 51% in 2006.

Most chilling are the individual examples of this shift in economic fortunes. In 1950, the chief executive officer of General Motors, Charlie Wilson, earned $663,000, 40 times the average worker’s pay. In 1970, graduate Mike Hughes got a supervisory job at the new RCA TV plant in Ohio and Pat O’Neill joined United Airlines as a mechanic. In 2004, O’Neill retired but his 401(k) plan suffered from a stock market fall and he had to take another job. The RCA plant shut and Hughes could only find work as a school janitor on 25% of his former pay.

By then, only 35% of US workers still had monthly pensions paid by their employer, down from 84% 25 years earlier. Just 18% received employer-paid health insurance, down from 70% in 1980. But the richest 1% of Americans took a near-record 23% of national income, earning a combined $1.35 trillion.

In what other Anglo-Saxon country have we seen a near-quadrupling of executive pay differentials in the past decade, top tax rates about to be cut, declining occupational pension coverage and now falling real incomes for most? This trend was forecast in the October 2012 Commission on Living Standards’ report Gearing for growth to continue to 2020 without policy changes. According to Aon Hewitt Pensions’ Pocket book, published last December, the fall in average employer contributions that occurred with the shift from defined benefit (DB) pension schemes (averaging 21.4% of pay) to defined contribution (DC) plans (6.9%) is continuing with the move to group personal pension (GPP) schemes (average 5.8%).

With the announcement of the £144 flat-rate state pension, pensions minister Steve Webb has struck a blow for pension equality. But which way are you leading pay and pensions policy in your organisation, and which way should you be?

Follow Duncan Brown on Twitter: @duncanbHR