Retirement Plans

Pension Reforms Worsening Income Gap

Study highlights negative effects of conversion of defined-benefit plans into defined-contribution plans.
Katie Kuehner-HebertMay 18, 2015

Pension reforms including the conversion of defined-benefit (DB) pension plans into defined-contribution (DC) plans are increasing the gap between rich and poor, according to a report by the National Conference on Public Employee Retirement Systems.

The report identifies the conversion trend as a “negative change” at both the national and state levels. In addition, negative changes at the state level have included cuts in benefits and increases in employee contributions.

“It is clear from the empirical data … that when DB plans are changed into DC plans, income inequality rises and economic growth dampens,” NCPERS said, referring to the effects of pension reforms at the national level.

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Similarly, at the state level, “the more negative changes a state makes to its pension plan, the higher is the income inequality in that state.” With a single negative change in pensions in a state, the study said, income inequality increases by 15% in that state.

“Policymakers should pay serious attention to income inequality and its hidden economic cost to taxpayers before they make the changes that diminish DB pensions,” the report’s authors wrote. “Rather than making changes such as increasing employee contributions, cutting benefits, converting DB plans into DC or hybrid plans and so forth, policymakers should close tax loopholes.”

The report cites a recent study of a number of states that found states on average gave away twice as much in economic development subsidies and loopholes as they were required to pay into annual pension contributions.

According to The Wall Street Journal, only 14% of U.S. private-sector workers were covered by defined-benefit plans in 2011, compared to 38% in 1979. By contrast, the percentage enrolled in defined-contribution plans more than doubled to 42% over the same period.

“The move to defined-contribution plans is, in effect, a benefit cut,” Hank Kim, executive director of NCPERS, told the WSJ.

Workers in defined-contribution plans, he said, would have less money to spend as they age, making them poorer and hurting the economy, because they often pay higher fees on their investments and have to invest more conservatively to protect their savings.