Public Pensions Shrink the Retirement Wealth Gap

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• On: 10/28/2023 13:33:57
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By: Tyler Bond, National Institute on Retirement Security (NIRS)
 
One of the defining challenges of our time is the growing problem of economic inequality in the
United States. As income and wealth inequality have risen during the past forty years, many potential solutions have been proposed. But one counterweight to increasing inequality that hasn't received as much attention is defined benefit pension plans. A new report provides a first-of-a-kind analysis on just how important pensions are in reducing wealth inequality.
 
Closing The Gap, jointly issued by the National Institute on Retirement Security and the UC Berkeley Labor Center, examines the role of pensions in providing adequate income to retirees analyzed by race, gender, and educational attainment. It also focuses on the role of pension plans in creating retirement wealth for workers.
 
The wealth-building impact of pensions is important, but often overlooked. When thinking about wealth accumulation, people typically think of owning stocks or a home, but not the value of a retirement plan like a pension. In fact, a retirement plan often is one of the largest financial assets of many households, so it's important to consider the impact of pensions in closing the wealth gap.
 
The report finds that including the value of pension income in household wealth boosts the typical (median) net worth of older families substantially—a whopping 36 percent. The power of pensions is even more substantial for older Black families. Pensions increase their median net worth by a staggering 86 percent, with public pensions providing more than half of this impact. And for older Latino families that historically have been underrepresented in the public sector, pension benefits increase their median wealth by 32.4 percent.

While other research has noted that pension plans tend to lessen the degree of inequality in the U.S., this report is the first to assign specific numbers to the large wealth impact of pensions. But the findings come as pensions continue to decline in the private sector, leaving Social Security and public pension plans as the two remaining protectors of retirement security for middle-class families.
 
While defined benefit pensions remain common in the public sector, legislative changes in recent years have led to plans with tiers with less generous benefits, the establishment of hybrid plans that include both pension plan and defined contribution (DC) plan components, or a choice between a pension or a DC plan. As the impacts of these changes are more fully felt in future years when more workers begin retiring under these new plans or tiers, the inequality-dampening effects of public pension plans may decline somewhat. In the meantime, the economic impact for today's retirees is more significant than most people realize, as public and private sector pension benefit payments in 2020 exceeded $600 billion nationwide.
 
And those pension benefits translate into meaningful retirement income. Those with a high school degree or less, but who had a pension, had $169,000 in pension wealth—significantly more retirement resources than typically seen among this group of workers.

Social Security and pensions, supplemented by 401(k)s and personal savings, supported the retirement security of the American middle class for decades. Thanks to this important new analysis, we now have data that shows the power of pensions for addressing a major economic and political problem facing the U.S.—the increased concentration of wealth that is leaving the middle class behind.

About the author: Tyler Bond is the research director for the National Institute on Retirement Security (NIRS). He works with the executive director to plan all NIRS research products. Since joining NIRS, Bond has authored or co-authored numerous research reports, issue briefs, and fact sheets on a wide range of topics relating to retirement security. He regularly speaks at conferences about NIRS research and testifies before policymakers.

Previously, Bond spent four years at the National Public Pension Coalition, where he directed the research program and authored six original research reports. He also has held positions on Capitol Hill and at the Center on Budget and Policy Priorities.

Bond holds a B.A. in political science and philosophy from Indiana University and an M.A. in public policy from The George Washington University. He is a member of the National Academy of Social Insurance.