The Hidden Costs of Pension Reforms: Rising Income Inequality, Lagging Economic Growth

When policymakers debate pension changes, the conversation often stops at one question: What will this save taxpayers? But new research from NCPERS reveals a more complex picture—one where cutting pension benefits doesn't just affect retirees, it ripples through entire economies.

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Reduced Pension Access Drives Income Inequality, Dampens Economic Growth

This comprehensive study, The Hidden Costs of Pension Reforms: Rising Inequality, Lagging Economic Growth, examines what happens when societies shift away from defined benefit pension plans through benefit cuts, increased employee contributions, or closures to new hires. Using rigorous multivariate analysis of data from all 50 states over two decades, the research uncovers a troubling pattern: pension reforms designed to save money may actually cost more in the long run. The findings show that each negative pension change increases income inequality in a state, and rising inequality in turn dampens economic growth by reducing consumer demand—the engine that drives 70% of our economy.

Key Findings

• Between 2000 and 2020, income inequality increased by approximately 18%. Rising inequality reduces growth in GDP by 2 to 4 percentage points annually.
• When income inequality rose by one unit in a state, the annual rate of economic growth in that state fell by 2%.
• The share of the U.S. workforce covered by pension plans decreased by 13 percentage points from 1977-2021. During the same time, the top income quintile earned almost 14 times more than the bottom quintile in 2021 compared to only 7 times more in 1977.
• A single negative pension change (i.e. benefits reduction, creating plan tiers, increased employee contributions, or plan closures) increased the ratio of the top to bottom income quintiles – the study’s measure of income inequality – by 0.27.
• The decline in union membership is highly correlated with income inequality at -0.97, indicating that as union membership declines, income inequality rises.
• The marginal tax rate declined from 70% in 1977 to 37% in 2021. During the same period, income inequality nearly doubled.

This Matters for Pension Funds and Beyond

The research reveals that pension reforms don't exist in isolation. When combined with regressive taxation and underinvestment in public education, these changes accelerate a "wheel of misfortune" that concentrates wealth at the top while weakening overall economic performance. The data demonstrates that states with stronger pension systems experience lower income inequality and more robust economic growth. Moreover, economic slowdowns directly impact the returns pension funds earn on their investments, creating a cycle that undermines the very savings these reforms promised.

Download the full report to explore the data, review the methodology, and see why strengthening—not weakening—public pensions may be the smarter path forward for states, taxpayers, and communities alike.

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