The Patriot-News yesterday highlighted a new report by the Pew Trust which finds that the middle class is shrinking. That’s interesting, especially given that, another part of Pew has been advocating for several years with former Enron billionaire John Arnold for policies that would further undermine the middle class. (Check on this link for one perspective on Arnold and Pew.)
Here’s what I mean: in widely publicized and influential work on public sector pensions Pew has been whittling away at middle-class retirement security where it still exists – in the public sector in the form of guaranteed defined benefit (DB) pensions. It has done this by promoting a shift to 401(k)s and other defined contribution (DC) savings accounts (here is a Pennsylvania perspective on Pew and Arnold).
Across the country, the shift Pew advocates away from DB pensions to individual DC accounts has increased the inequality of retirement income dramatically. Retirement benefits in traditional DB plans are distributed equally (as illustrated in this figure). The overwhelming majority of benefits from DB pensions goes to people with pensions of $15,000 to $75,000. By contrast over two thirds of savings in defined contribution accounts are in the accounts of the top income fifth (as shown on p. 28 of the Retirement Inequality Chartbook). In other words, the inequality of retirement savings in 401(k)-type plans mirrors the overall inequality of income documented for every state by our labor economist Mark Price. The equity of retirement savings in DB accounts is a throwback to the glory days of America’s middle class, in the 1960s and 1970s.
In Pennsylvania, Pew was the main champion for the hybrid pension (part DB, part DC) that may be adopted in conjunction with the state’s overdue budget. Pew highlighted the federal employee retirement system as a model hybrid. This helped win over a bipartisan group of Senators – including reluctant Democrats – to live with a hybrid pension for future teachers, nurses, and other public servants. As the Pennsylvania pension discussion has moved forward, Pew has been quoted by reporters – who rarely point out Pew’s connection to the Arnold Foundation – calling Pennsylvania’s hybrid “a national model for reform.”
Pew has failed to enlighten Pennsylvania’s press (or legislators) that the Pennsylvania Senate’s hybrid pension is dramatically inferior to the one for federal employees — which makes it, well, less of a model. The chart below shows that the guaranteed pension that is part of Pennsylvania’s hybrid pension would only provide a benefit 54% of the federal hybrid by the end of a long retirement.
The federal hybrid is also superior to the inadequate Pennsylvania hybrid in other ways, as we pointed out earlier this week. (For example, the federal hybrid plan provides as much as twice the employer contribution to DC retirement savings (5% vs. 2.5%).)
So here’s our plea to the part of Pew that put out the report on America’s shrinking middle class – let’s call it the left hand. Could you talk to your colleagues partnering with John Arnold and let them know that, the last thing America’s middle class needs right now, as a highly credible liberal think tank piling on the already powerful forces weakening middle class retirement security in America?