Pension changes could be dampening the economy

Pensions & Investments

Some pension program changes, such as the shift to defined contribution plans from defined benefit plans, might be widening the income gap and dampening economic growth, said a new report from the National Conference on Public Employee Retirement Systems.

There are conversations about income and equality, but few touch on the treatment of pensioners and how that contributes to income inequality, said Hank Kim, Washington-based, executive director and counsel at NCPERS and co-author of the report.

In the private sector, there has been a shift to DC plans from DB plans. Between 1975 and 2011, the number of private sector DB plans declined by 57% and the number of employees covered by DB plans declined 10%, NCPERS’ research found.

While DB to DC conversion is less common in the public sector, there are other changes — benefit reductions and increased employee contributions — that increase income inequality and hinder economic growth, according to the NCPERS report.

A single negative change affecting plan participants and beneficiaries increases income inequality by 15%, according to the report, “even when other factors contributing to income inequality, such as lack of investment in education, are taken into account,” the “relationship holds true.”

The report further examined the relationship between income inequality and economic growth, and found that an increase in income inequality decreases economic growth. “When inequality – the ratio of the top and bottom quintiles – increases by one … it decreases the state’s economic growth by 18%, the report found.

Often times, policymakers are implementing pension changes when the “real fundamentals of the plans are sound,” Mr. Kim said. Policymakers need to “take a deep consideration of the impact (they) are having” before they make changes to these plans.

Between 2000 and 2013, 34 states increased employee contributions to pension plans, 38 instituted higher age and service requirements, 30 reduced cost-of-living adjustments and 18 took steps to convert to a defined contribution program, according to the National Conference of State Legislatures, cited by NCPERS in its report.

From 2000 and 2010, the states that enacted the most changes to their retirement programs were California, Colorado and New Jersey.

“There is a bit of cutting off your nose to spite your face,” when policymakers implement changes on the argument these plans are unaffordable, Mr. Kim said.

Pension plans create senior consumers who, in turn, spur economic growth, he said.

The NCPERS report pointed to a 2012 study from the National Institute on Retirement Security, which found that DB plans support 6.5 million jobs and $1 trillion in economic output. NIRS also found that every dollar paid in pension benefits supports $2.37 in economic output.

The report, “Income Inequality: Hidden Economic Cost of Prevailing Approaches to Pension Reform,” reviews pension changes, income inequality and economic growth from the 1980s to 2000s and is available online. A breakout of pension changes by state is also available as part of the report.