A widely cited 2024 study by the National Conference of Public Employee Retirement Systems, ”The Hidden Costs of Pension Reform: Rising Income Inequality, Lagging Economic Growth,” argues that the national shift from defined benefit pensions to flexible 401(k) plans and other defined contribution retirement systems has exacerbated income inequality and slowed economic growth in America. While this isn’t a recent study, it’s important to examine it because its methodology is odd and riddled with unproven assumptions. The results lack significance.
The study does not evaluate individual companies, municipalities, or retirement systems that implemented changes to their retirement benefits. Instead, it investigates the impact of the national shift to defined contribution plans on inequality by merely identifying a correlation between income inequality and the percentage of American workers in a defined benefit plan. Then, to evaluate the impact of pension reforms in the public sector, the researchers inappropriately correlate the average inequality ratio in a state over 21 years with the mere number of bills that reformed public employee retirement benefits in each state during the period, without accounting for the timing or magnitude of those reforms.
In reality, the pension reforms that the study claims are detrimental to employees often lead to better benefits and retirement security, while ensuring the sustainability of retirement systems. These reforms also prevent pension debt from crowding out essential public services during economic downturns—ensuring that state and local governments can continue to serve their communities.
We explain below why the study’s methodology and assumptions are flawed and fail to support its claims. Ultimately, policymakers must continue to address the critical need to improve the design and funding of retirement programs for public employees and taxpayers. This process increases, rather than decreases, equity and economic growth.
The problem with broad correlations
In the past, defined benefit (DB) pensions were commonly offered to employees in both the private and public sectors, but most private employers have transitioned to defined contribution (DC) plans in recent decades. This shift occurred because macroeconomic changes and increases in corporate financial disclosures revealed the true riskiness of providing DB pensions. Economic and technological developments also made the American workforce more mobile and dynamic, creating a greater need for portable retirement savings.
The shift to DC is lagging in the public sector, but in the private sector, both employees and employers have benefited from portable, flexible retirement benefits, which have helped to increase retirement security in America. According to Bureau of Labor Statistics survey data from 2025, among private-sector workers, 14% had access to a DB pension and 70% had access to a DC plan. Among state and local government workers, by contrast, 86% had access to a DB and 36% had access to a DC.
To investigate the impact of the shift to DCs in the public and private sectors on nationwide economic inequality, the NCPERS paper simply correlates the share of American workers in a DB plan with the ratio of the incomes of the top and bottom earners. In other words, as DB participation declined over time, the authors tested whether income inequality had risen in parallel. The result is predictable: There is, of course, a strong correlation. This is to be expected, as it is well known that in the past century, America experienced both a shift to DCs and a rise in economic inequality.
This methodology misattributes these two broad social trends occurring simultaneously as though they are linked—and boldly, the authors claim this is sufficient evidence to prove they are causally connected, as if a correlation between variables were enough to prove one caused the other.
The weakness of this approach can be illustrated with a hypothetical example: Over the past few decades, union membership has fallen sharply in the U.S., while median income has risen annually. Running a broad correlation between these two trends yields highly statistically significant results: a negative correlation coefficient of -0.8, indicating a strong inverse relationship between the variables, and an R-squared of 0.64, allegedly demonstrating that the decline in unionized private-sector workers “explains” 64% of the variance in median income.
Yet, it would be absurd to conclude that declining union membership caused incomes to rise in America, or that it wasn’t the other way around—income growth leading to a decline in union membership. Both variables are influenced by many other socioeconomic dynamics, which broad correlations like this example simply cannot capture. The same is true for the NCPERS analysis of the decline of DB plans in America and its relationship to income inequality.
Simplistic correlations on a national scale don’t mean much. At best, they are a starting point for further investigation, not a sufficient basis for asserting a meaningful relationship, let alone causation, and certainly not a justification for policy action.
Wrong variables and loaded assumptions
Another simplistic correlation run in this study attempts to isolate the impacts of public-sector pension changes on state-level inequality. The authors collapse 21 years of state income-inequality data—measured as the top-to-bottom quintile income ratio—into a single value, without explaining how observations across years are combined. They then relate this value to the total number of “negative pension changes” enacted in that state over the same period and assess the strength of the relationship.
Unfortunately, we cannot fully assess the strength of this and other correlations in the study because basic statistical measures, such as p-values or R², were not disclosed.
Even with proper statistical reporting, the study’s design has serious, insurmountable methodological concerns. First, by combining two decades of data into a single inequality measure, the study discards all information about the timing or sequencing of events. A state that enacted reforms in 2006 is treated no differently from one that enacted them in 2019, even though the potential effects of these reforms on inequality would unfold differently. This methodology makes it impossible to capture whether increased inequality tends to precede, coincide with, or follow pension reform.
Further, by combining 21 years of income inequality data into a single variable, trends are erased. A state in which inequality is rising following pension reforms could be indistinguishable from a state where inequality remained flat or declined, simply because it started from a lower baseline—erasing the literal thing the study is attempting to measure.
Moreover, the study never considers that causality could plausibly run in the opposite direction. If state-wide income inequality and public employee pension reforms are correlated, could it be that inequality leads to reform? States already facing fiscal stress—which could manifest in high inequality—may be the most likely to enact pension reforms. This reverse causation is left unaddressed.
On the other hand, the variable representing pension reform is simply the number of bills approved in each state. This introduces many more insurmountable problems.
First, by using the number of pension changes as the key explanatory variable, the analysis treats all reforms as equal in size and scope. For example, minor reforms, such as Arkansas’s 2017 adjustment from an automatic 3% cost-of-living adjustment (COLA) increase to a Consumer Price Index (CPI)-based COLA with a 3% cap, are treated the same as major reforms, like Oklahoma’s complete transition from a DB to a DC system.
Reforms are not evaluated by their final impact on public employee benefits, but rather by the number of approved bills. A meaningful investigation into the impact of pension reform on inequality demands accounting for the magnitude of changes. Without this granularity, the findings of this analysis become even less informative.
Second, it assumes all reforms to pension benefits are inherently detrimental to employees/new hires, labeling all changes as “negative pension changes.” This is inaccurate for the following reasons:
1. The “negative pension reforms” include bills mandating increased contributions to new-hired employees. However, the increased employee contributions in the list could have been implemented in response to or in conjunction with pension benefit increases. Therefore, employees could have ended up with a better retirement benefit, but given these changes motivated reform to the system, they are nevertheless accounted as “negative reforms” in the paper.
2. Even the reforms that were not associated with pension enhancements were still done to ensure funding and retirement security. Rather than “harming” employees, these adjustments protect against underfunding that could lead to benefit cuts such as COLA reductions—a trade-off between marginally higher contributions and better retirement security.
3. Even in instances where pension reforms decreased retirement benefits offered to newly hired public employees, it is not appropriate to assume that they reduced total compensation. Pensions are only one facet of employee compensation. Any eventual reductions in retirement benefits could necessitate salary increases, which would merely shift total compensation towards salaries and away from pensions, a shift that data shows employees prefer.
Although raises are not typically part of the pension reform, hiring managers may increase salaries or make other job aspects more attractive (such as hours or vacation time) if they encounter significant difficulties in hiring employees following pension reforms. Assuming that a reduction in retirement benefits offered to new hires necessarily means they receive lower total compensation is inappropriate and neglects basic economic principles.
Pension reform promotes equity
Pension reforms have a myriad of shapes and outcomes. Well-designed reforms can enhance equity—both within the public workforce and across the taxpayers who fund these systems.
In general, traditional DB plans tend to disproportionately benefit long-tenured employees while significantly disadvantaging the majority of public workers, who leave before vesting in meaningful pension benefits.
Reason Foundation’s actuarial review of 12 public pension systems shows that only about 38% of new hires remain in their jobs long enough to vest in meaningful retirement benefits—a staggering mismatch between system design and workforce realities. This means that the majority, 62%, leave before the vesting threshold and must forgo the contributions made by their employer.
Reformed systems can eliminate this disparity, ensuring that each year of service results in meaningful, vested retirement savings.
Equity considerations extend beyond the workforce. In underfunded DB systems, current taxpayers are often burdened with funding public employee benefits promised decades ago for services they are not personally benefiting from. Pension reforms to DB systems can better align costs with the period in which public services are provided, preventing the intergenerational transfer of pension costs and ensuring that today’s workers and taxpayers are not forced to finance yesterday’s promises.
According to Reason Foundation’s Annual Pension Solvency and Performance Report, in fiscal year 2024, 55% of public pension contributions were consumed by amortization payments—that is, costs tied to inadequate past contributions rather than funding benefits being earned today. Well-structured pension reform can reduce this burden by introducing risk-sharing mechanisms and dynamic contribution policies that keep plans properly funded in real time. These measures allow governments to provide the same level of retirement security at a lower long-term cost to both employees and taxpayers.
In this way, pension reform can dismantle inequitable structures embedded in legacy systems, broaden retirement security, protect public services, and distribute fiscal responsibility more justly across generations.
The NCPERS study relies on broad correlations, inadequate variables, and untested assumptions, leading to a perspective that does not reflect the realities of pension reform. By characterizing all reforms as uniformly harmful and overlooking both their timing and scope, the analysis fails to capture a meaningful relationship between pension reform and inequality.
In practice, well-structured reforms strengthen income equality: They broaden access to retirement savings for a mobile workforce, align costs with the services that generate them, and reduce the intergenerational inequities created by decades of underfunding. Well-designed pension reform is essential to safeguarding public services, protecting taxpayers, strengthening government credit quality, and ensuring sustainable retirement security for future public employees.