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Portfolio > Economy & Markets > Fixed Income

Blame the 401(k) for the wealth gap

By Marlene Y. Satter

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Rising income inequality is a byproduct of pension reform actions that have made people rely on defined contribution plans rather than defined benefit plans.

So says research from the National Conference on Public Employee Retirement Systems, which made the point in a paper titled “Income Inequality: Hidden Economic Cost of Prevailing Approaches to Pension Reforms.”

The paper found that benefit cuts, larger employee contributions and conversion of DB plans into DC plans had a negative impact, not just on plan participants and their beneficiaries but on local economies, as well.

In analyzing the relationship between pension changes and income inequality at national and state levels, researchers found that “that income inequality was highly co-related with the trend toward conversion of DB into DC plans.”

Analysis also found that because of the high correlation between income inequality and the percentage of the workforce covered by DB plans, the lower the percentage of people covered by DB plans, the higher was income inequality. There were other factors, of course, in causing income inequality to rise, including “changes in the percentage of the workforce in unions, marginal (top income) tax rates, and the rate of investment in public education.”

When these factors decreased, income inequality increased.

Higher income inequality also indicated lower economic growth, both on national and state levels. When considered on a state level, the study found that the higher the number of negative pension changes made by a state government, the higher is the increase in income inequality in that state.”

State-level data allowed further analysis of the relationship between pension changes and income inequality, and between income inequality and economic growth.

The results indicated that for “a single negative change in pensions in a state, income inequality increases by 15 percent in that state. This relationship holds true even when other factors contributing to income inequality, such as lack of investment in education, are taken into account.”

The study suggested that policymakers should consider, instead of making negative changes to DB plans, closing tax loopholes. “A recent study of a number of states by Good Jobs First shows that on average states gave away twice as much in economic development subsidies and loopholes as they were required to pay into annual pension contributions…. Whereas taxpayer money given through loopholes and subsidies often ends up in overseas tax havens, pension checks are spent locally and stimulate local economies.”

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