The Impact of Pension Benefits on the Distribution of Earned Income

Abstract

Using standard measures of income inequality and detailed pension benefit information on participants in the 1983 Survey of Consumer Finances (SCF), the authors investigate how pension benefits affected the distribution of earned income. The results suggest that private pensions increased annual income inequality (relative to inequality observed in the distribution of wage income) by only about 2% among all employed individuals, but by 21% among unionized workers. Further analysis indicates that private pensions raised annual income inequality primarily by increasing the rate of return to tenure, possibly through pension “backloading” (setting accruals to grow when earnings rise near retirement) and the increasing incidence of pensions with age. Private pensions had little effect on estimates of the distribution of expected lifetime income, but the addition to the analysis of social security benefits (public pensions) strongly reduced inequality in that distribution.

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