What is Pay? What is Wealth?
By David Henderson
I remember talking to Walter Oi about pay in the early 1980s. He had an idea to write up a paper titled “What is Pay?” I don’t think he ever did. But here was the issue he led with.
The Air Traffic Controllers union had gone on strike and President Ronald Reagan, in his first year in office, had fired them while giving them no chance of being re-employed. Walter pointed out that some of them were within just a few years of getting pensions whose present value (the value of the stream of pension income they would get discounted back at a reasonable interest rate to the present–then 1981) was close to a quarter of a million dollars. In today’s dollars, that would be about $650,000. That’s what most readers–and writers–of this blog would consider a lot of wealth. “For them to go on strike, they must have put the probability of Reagan firing them at about one or two percent,” said Walter with his great chuckle and his sparkling smile.
His general point was this: we can’t simply look at someone’s current pay to really know what his pay is, at least in the sense that we want to know pay. If the person will get that pay for a long time, if the probability of getting fired is low to zero, and if the person qualifies at a relatively early age for an inflation adjusted defined-benefit pension, then pay is much higher than it looks.
This reminds me of a case I’ve written about before: a husband and wife couple I visit in Detroit every summer who make their living as business people. They live in one of the few upper-middle-class to upper class enclaves left in Detroit.
They have neighbors down the street, a couple in their late 50s to early 60s. They retired a few years ago as teachers in government schools with pensions of about $60K each, inflation-adjusted. My friends’ only “pensions” are the 401-k’s and IRA’s that they squirreled away in their 6 or so good years out of the last 28 years.
Their neighbors attack the “rich” and the “top 1 percent.” They have my two friends, and some other neighbors, in mind. But the present value of these neighbors’ retirement incomes, if they each live another 30 years and at a real interest rate of 4%, is just over $2 million. If they live another 25 years, it’s almost $1.9 million. Their equity in their house almost certainly is at least $200K. I’ll bet dollars to doughnuts that they don’t refer to themselves as multi-millionaires. They should.
Moreover, as I noted earlier this month, I recently went to a retirement planning seminar, where I learned that if I retire at the end of 2016 at age 66, my annual inflation-adjusted retirement pay will be about $60K. If I live another 25 years after that, which looks plausible, my retirement pay alone will have a present value of over $900K. Combine that with a house in coastal California that’s almost paid for and various IRAs and 401-k accounts, and I should call myself a multi-millionaire.