Pension Conversions Linked to Income Inequality

Policymakers must pay attention to income inequality and its hidden economic cost to taxpayers. Rather than making changes that diminish defined benefit (DB) pensions, a report by the National Conference on Public Employee Retirement Systems (NCPERS) advises closing tax loopholes.

Data at the national level showed that a trend of converting DB plans into defined contribution (DC) plans exacerbated income inequality in the U.S. At the state level, there is a positive relationship between the number of negative pension changes, such as reductions in benefits, and income inequality. This suggests that as a state makes more negative changes, its rate of income inequality increases and that, in turn, hurts the economy.

“Our study provides important information and insights to help policymakers recognize the connection between diminishing pensions and widening income gaps,” says Hank Kim, Esq., NCPERS executive director and counsel. “Income inequality matters because when the rungs of the economic ladder are too far apart, fewer people can climb it, and that undermines our national prosperity.”

According to the “Income Inequality: Hidden Economic Cost of Prevailing Approaches to Pension Reforms” study, pensions play an important role in the U.S. economy, stimulating local economies and presenting a source of capital. Specifically, DB plans support 6.5 million jobs and $1 trillion in economic output, the National Institute on Retirement Security reports.

Certain pension reforms—including cuts in pension benefits and conversions of pensions into defined contribution plans—increase income inequality. Other initiatives, such as raising employee contributions, also have a negative effect on local economies. On the other hand, the spending of pension checks is a significant contribution to stimulating the economy. 

“Spending by retirees is vital to communities, yet local spending can easily be undermined by short-sighted changes to DB pension plans,” explains Mel Aaronson, NCPERS president.

Further, statistics reveal a negative correlation between economic growth and income inequality: -0.553. A single negative change in public pensions in a state increases income inequality in that state by about 15%.

Two out of three Americans are concerned that the rich are getting richer while the poor are getting poorer, a Gallup Poll finds. Researchers believe this highlights the need for stakeholders and policymakers to avoid making negative changes, specifically converting DB plans into DC or combination plans. According to the study, 15 million additional workers would currently have DB plans if there had not been a trend over the past 30 years to convert pensions into DC plans.

“Income Inequality: Hidden Economic Cost of Prevailing Approaches to Pension Reforms” examines national developments in pension changes, income inequality and economic growth across the 1980s, 1990s and 2000s. It also looks at trends in each of the 50 states from 2000 to 2010. The complete report is available here.