Reduction in Pension Benefits Leads to Wider Income Inequality, Study Finds

The continuing decline of the number of defined benefit pension participants in the U.S. is widening America’s income equality gap, which in turn is stunting economic growth, according to a recent study from the National Conference on Public Employee Retirement Systems.

The study also found that public policies aimed at cutting public costs by reducing pension benefits or switching to defined contribution plans may actually increase the need for public spending due to “the dynamic interrelationship between pension reforms, income inequality, the economy, and market return.”

NCPERS noted in its report that, “for many years,” there has been a shift to defined contribution plans from defined benefit plans, particularly in the private sector, while changes to state and local public pensions include raising employee contributions, cutting benefits and closing pensions to new hires. According to NCPERS, the changes, which it refers to as negative pension changes, “exacerbate income inequality.” The report added that despite the slowdown in economic growth caused by the widening income inequality gap, the impact of pension changes on income inequality and economic growth are often overlooked by policymakers.

“Our analysis shows that, at the national level, income inequality is inversely correlated with the shift from DB plans to DC plans,” the report’s authors wrote. “This means that the lower the percentage of the workforce in DB plans, the higher the rate of income inequality, and vice versa.” The report added that policymakers “should think twice before they make changes that undermine public sector pensions or support policies that encourage elimination of pensions in the private sector.”

The report also stated there is a misconception that the only beneficiaries of public pension plans are its participants and that taxpayers are forced to burden the associated costs.

“This is an incomplete picture, however, as it completely ignores how pensions contribute to broader income equality—and not just among retirees,” the report stated. “It also overlooks how retired pension members contribute to local and state economic activity by spending their pension income and how the investment of trillions of dollars of pension fund assets grows local economies and generates billions in tax revenues.”

According to NCPERS’ analysis, in addition to the “negative” pension changes, the “key variables” widening the income inequality gap include a lack of investment in public education, regressive taxation and a decline in union membership. NCPERS reported that income inequality decreases when access to defined benefit plans, investment in public education and union membership increase.

“The present study finds that pension reforms generally exacerbate income inequality and dampen economic growth,” the report’s authors wrote. “An awareness of the impact of changes to pensions on income equality and economic growth is often, however, missing in pension policy debates.”