One of the defining challenges of our time is the growing problem of economic inequality in the

United States. In 2021, the top ten percent of Americans held nearly 70 percent of U.S. wealth, up from about 61 percent in 1989. The share held by the next 40 percent dropped correspondingly over that period, while the bottom 50 percent (some 63 million families) owned only about 2.5 percent of wealth in 2021. Not only does this economic inequality create hardships for families, experts agree that it is fueling discontent and political polarization in America.

As income and wealth inequality have spiked dramatically during the past forty years, advocates, researchers, and policymakers spanning the ideological spectrum have offered explanations on causes and potential solutions. 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.

Pensions Dramatically Boost Wealth, Especially for Blacks and Latinos

The wealth-building effect of pensions is important, but often overlooked. When thinking about households accumulating wealth, it’s typically thought of as 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. Thus, it’s important to consider the impact of pensions in closing the wealth gap.

The new 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 are on the decline in the private sector, leaving Social Security and public pension plans as the two remaining protectors of retirement security for middle-class families. This is especially true for Black workers, who have found public sector employment to be a pathway to the middle class due to the history of occupational segregation in the U.S.

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.

Pensions Also Boost Wealth for Women and Those Without a College Degree

Closing the Gap also shows the importance of pension plans for women and those without a four-year college degree. The report finds that public pension income is distributed more equally by gender than private pension and 401(k) income, which reflects different employment patterns by women. In addition, retirees fare better economically with a pension regardless of educational attainment, with the largest improvement among those without bachelor’s degrees.

Closing the Gap uses 200 percent of the Federal Poverty Level (FPL) as a helpful benchmark to assess the poverty-alleviating impact of pensions. And this impact is profound. Across all retirees, a significantly larger share of U.S. retirees with pension income were above 200 percent FPL in 2018-2020 (91%) compared to retirees without pension income (60%). Retired Black women, Latino men, and Black men were twice as likely to have incomes above 200 percent FPL if they had a pension. Those with no college education, but who have a pension, were 73 percent more likely to be above 200 percent of the FPL than those with no college education and no pension.

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. While these programs continue to provide substantial retirement income for retirees today, they face stiff headwinds. Social Security faces funding challenges, pensions are no longer widely available to private-sector workers, and 401(k) plans are underfunded except for the highest income workers. For most families, 401(k) savings and Social Security just won’t provide sufficient retirement income, and the problem is even worse for women, Blacks, Latinos, and those lacking a college degree.

Thanks to this important new analysis, we now have data that for the first time shows the power of pensions for addressing a major economic and political problem facing the U.S. – economic inequality. Clearly, pensions play an outsized role in closing the growing wealth and retirement gap. Perhaps policymakers should place a higher priority on making pensions more widely available to working Americans. Not only would pensions improve working Americans’ financial outlook, but the reduced stress also could play a significant role in addressing the social discontent that is ailing the nation.