Industry News

On June 18, 2024, the National Conference of Public Employee Retirement Systems (NCPERS) released its report, The Hidden Costs of Pension Reforms: Rising Income Inequality, Lagging Economic Growth. The NCPERS research examines the relationship between pension reforms (mainly benefit reductions) in both the public and private sector as well as income inequality and economic growth.

According to NCPERS, “Policies that reduce pension benefits or promote transitions to defined contribution plans, which are usually implemented to save money, may end up costing more due to the dynamic interrelationship between pension reforms, income inequality, the economy, and market returns.”

Some of the highlights include:

• The share of the U.S. workforce covered by defined benefit pension plans decreased from 50% in 1977 to about 37% in 2021, or a decrease of 13 percentage points. In 2021, the top quintile of earners made 14 times more than the bottom quintile, compared to only 7 times more in 1977. 
• Between 2000 and 2020, income inequality increased by about 18%.
• On an annual basis, increasing inequality reduces growth in the Gross Domestic Product (GDP) by 2 to 4 percentage points.
• When income inequality increased by one unit in a state, the annual rate of economic growth in that state declined by 2%.
• A single negative pension change (i.e., benefits reduction, increased employee contributions, creating plan tiers, or plan closures) increased the ratio of the top to bottom income quintiles (the study’s measure of income inequality) by 0.27.
• In 1977, the marginal tax rate declined from 70% to 37% in 2021. During the same time period, income inequality almost doubled.

The report is available here.