Shift away from DB widens income gap

Protest Occupy Wall StreetReforms that negatively affect pension plan participants and beneficiaries also exacerbate income inequality and hinder economic growth, finds a National Conference on Public Employee Retirement Systems (NCPERS) study.

The study, Income Inequality: Hidden Economic Cost of Prevailing Approaches to Pension Reforms,showed a strong correlation over three decades between the declining number of workers covered by DB plans and the growing income gap between rich and poor Americans.

Other variables that were associated with increased income inequality included declines in unionization, marginal tax rates, and investment in education.

The study examined national trends in pension changes, income inequality, and economic growth in the 1980s, 1990s, and 2000s, as well as trends in each of the 50 states from 2000 to 2010. Among the findings:

  • 15 million additional workers would have DB plans if there had not been a trend over the past 30 years to convert pensions into DC plans;
  • The correlation between economic growth and income inequality in the United States is negative 0.553; this relationship means that higher the income inequality, the lower is the economic growth; and
  • a single negative change in public pensions in a state increases income inequality in that state by about 15%.

“Personal income loss has a ripple effect, and everyone suffers when income inequality rises and economic growth weakens,” says NCPERS president Mel Aaronson. “Spending by retirees is vital to communities, yet local spending can easily be undermined by short-sighted changes to DB pension plans.”