Every American deserves a secure retirement. Yet increasingly, companies are terminating their pension plans and transferring the risk of saving for retirement onto their employees. At the same time, many of these same companies have turned their executive pension plans into CEO wealth creation devices. As a result, many companies have a two-tier retirement system: one for the CEO and one for everybody else.

Traditionally, defined-benefit pension plans have promised workers pension benefits based on a percentage of their final salary. More and more companies are converting these plans to cash-balance formulas that may discriminate against older workers. Others are creating 401(k) plans that expose employee retirement savings to stock market fluctuations or the performance of their employers' own stock.

While workers’ retirement security has eroded, many CEOs have negotiated retirement benefits that promise a lifetime of income far exceeding what they would be entitled to under the retirement plans of their rank-and-file workers. The promise of a virtually guaranteed multi-million dollar annual pension—no matter what happens to the company or its stock price—dramatically undermines the goal of linking CEO pay to performance.

Executives have received these extraordinary retirement benefits at the same time workers are being asked to bear increased risk for their retirement security. According to the U.S. Bureau of Labor Statistics, fewer than half of all workers receive any retirement benefits from their employers. Those who do are far more likely to have defined-contribution 401(k) plans than defined-benefit pension plans.

CEOs have a big incentive to convert their employees’ defined-benefit retirement plans. Under defined-benefit pensions, employers would contribute about 8 percent of their payroll. With 401(k)s, companies typically contribute between zero and 3 percent of payroll. This cost-cutting in turn can result in higher pay for the CEO and is easy to do when the CEO’s retirement benefits are protected by a special executive-only “Top Hat” plan.

Learn more about defined-benefit pensions.