How Are Current Pension Reforms Actually Widening The Wealth Gap For Average Americans?

Why Do Experts Say Shifting Retirement Policies Is Hurting Economic Growth?

Analyze the findings of The Hidden Costs of Pension Reforms to understand the link between retirement policies and income inequality. Discover why experts argue that current reforms undermine economic stability and public education. Don’t overlook the connection between your retirement plan and the broader economy. Read on to explore the critical data demanding a rethink of how we fund the future.

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That old refrain about the rich getting richer and the poor getting poorer describes the pension system in the United States. And that system is changing for the worse, according to pension experts Michael Kahn, Robert Kuttner, Teresa Ghilarducci, and Keith Brainard. They find that most Americans must dip into their retirement savings and go into debt to fund current consumption, while those at the very top prosper. Their erudite analysis explains how pensions affect economic inequality, consumption, and the overall economy to worryingly negative effect.

Take-Aways

• Misperceptions about pensions’ roles in the economy inform policy debates.
• Current pension structures are an additional driver of economic inequality.
• Policymakers must rethink pension reform.

Summary

Misperceptions about pensions’ roles in the economy inform policy debates.

A simplistic, misguided view of the role of pensions holds that they benefit plan participants exclusively and that taxpayers, states, and local entities bear their costs. In reality, public pensions help support local economies and raise tax revenues to fund public education.

“Policy discussions of public sector pension ‘reforms’ can often boil down to simplistic zero-sum arguments.”

The trend in pension reforms, especially in private industry, has been a shift away from defined benefit plans — which pay a set amount to retirees — to defined contribution plans, to which workers must contribute. The public sector has experienced benefit reductions, a change of contributions from employer to employee, and the elimination of eligibility for the newly hired.

Current pension structures are an additional driver of economic inequality.

Pension reforms drive increasing income inequality which, in turn, negatively affects economic well-being. This inequality fuels an increased and increasing concentration of economic and political power, driving policy decisions that disproportionately benefit the few at the expense of the many. Greater polarization and governmental dysfunction, in turn, imperil democracy.

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

Change in the pension arena has redounded to the benefit of the wealthy, while the majority experience greater income inequity. This is part of a larger trend that began in the 1980s and saw a steep decline in marginal tax rates. Policymakers reasoned incorrectly that economic growth would ensue.

Instead, a more regressive tax system resulted, with the highest earners’ share of the tax bill lower than that of wage earners at the bottom. A lower tax take reduces investment in public education, closing off opportunities for advancement to those less well-off. At the same time, public policy worked against unionization and attempts to raise wages for the average citizen, furthering the economic divide. While the affluent can save, those less affluent fund consumption increasingly through debt. The resulting social immobility leaves behind a great swath of individuals who have inadequate education and are thus poorly equipped to function in a globalized economy. Lower consumer demand hampers GDP growth and financial markets. Declining asset values affect pension plan returns for those who rely on them for their subsistence.

Policymakers must rethink pension reform.

The current policy trajectory will continue to enable growth for the wealthiest while reducing access to education and advancement opportunities for the average citizen. The result will be ever-increasing economic inequality.

“Actions to increase income equality — such as instituting a progressive tax framework, broadening access to pensions, increasing investments in public education, or promoting workers’ right to organize — are correlated with a positive ‘trickle up’ effect, benefiting all layers of the population.”

Policymakers should work to enable greater access to pensions under a more progressive tax system that could adequately fund public education. This would create a more level playing field that would spur greater overall prosperity.

About the Authors

Michael Kahn, PhD, is the director of research at the National Conference on Public Employee Retirement Systems (NCPERS). Robert Kuttner is a professor at Brandeis University and the co-founder and co-editor of The American Prospect. Teresa Ghilarducci is a professor at The New School for Social Research. Keith Brainard is the research director at the National Association of State Retirement Administrators.