We know that defined-benefit retirement plans offer economic stability to retirees: a steady income that they will receive as long as they live. But a lot more happens when those public and private sector retirees spend that monthly check, according to a new economic study.
The study found that defined-benefit (DB) retirement spending in the United States creates a “ripple effect” that supports millions of jobs, $943 in total economic output and $135 million in federal, state and local tax revenues.
Moreover, because those retirement checks don’t fluctuate with the markets and economic climate, they provide a stabilizing effect on local economies, especially in small towns and rural areas, the report said. Contrast the security of that steady income with defined-contribution plans, such as 401(k) plans, whose ups and downs can affect spending significantly.
Authored by Nari Rhee, “Pensionomics 2014” was issued July 30 by the National Institute on Retirement Security (NIRS), a non-profit research institute dedicated to helping people understand the value of retirement security to employees, employers and the economy as a whole. It uses data from 2012, the most recent available. NIRS issued similar reports in 2009 and 2012. The report separately measures the impacts of state and local pension benefits on individual state economies.
The study uses a methodology that measures direct, indirect and induced effects of spending on the larger economy. For example, when someone spends money at a grocery store, it directly impacts that store’s bottom line. It also indirectly impacts the store’s suppliers. Additionally, it induces spending by employees of the grocery store and the employees of its suppliers, and so on. Of course, retirees also pay income, sales and other taxes.
Accordingly, DB pensions supported a total of 6.2 million American jobs in 2012, nearly 3 million through direct impact of retiree spending and the remainder indirect or induced. Likewise, $415.8 billion of the $943.3 billion in total economic activity supported by defined-benefit plans constituted direct impact. The healthcare industry, food and beverage businesses, and real estate sector were the top three beneficiaries of DB retiree spending.
These are some enormous numbers. In employment, for example, the report said that “the 6.2 million jobs supported by pensioners’ expenditures exceed the number of jobs in the entire private construction industry, 5.6 million jobs in 2012.” Measured another way, those jobs are equivalent to half the unemployed workers in the country.
One key to understanding this significant impact may be in the sheer number of people who still receive defined-benefit pension benefits, despite their decades-long decline in favor of defined-contributions savings plans. In 2010, for instance, 22% of all full-time private sector employees still had DB pension plans, the report said. In 2012, state and local plans had 9 million beneficiaries, federal plans had 2.5 million beneficiaries and private sector plans had 12.7 million. Even though the average DB plan benefit totaled a modest $19,678 a year, there was a whopping $476.8 billion in DB pension payouts to 24.2 million retirees and beneficiaries.
“Virtually every state and local economy across the country benefits from the spending of defined benefit pension payments,” Rhee writes.
The report contains some other interesting numbers that fly in the face of the “facts” presented by DB pension detractors. From 1993 through 2009, the study found, employer contributions accounted for less than a quarter of the money used to pay pension benefits. Specifically, employer contributions, i.e., our tax dollars, made up 24.52% of the total payout and employee contributions comprised another 12.3%. The remaining 63.18% — nearly two-thirds – came from investment earnings on those contributions.
As the author reminds us, those earnings came during one of the most volatile periods in investment history, which included the 2000 bursting of the tech bubble and 2008 financial crisis. Combined with the economic impact of pensioners’ spending, NIRS calculated that every taxpayer dollar contributed to state and local DB plans over 30 years generated more than $8 in total economic output.
“This reflects the fact that taxpayer contributions are a minor source of financing for retirement benefits,” the report said. “The bulk of DB pension benefits come from investment earnings and employee contributions.”
The prefunding that allows those investment earnings to build up also contrasts with “pay-as-you-go” systems such as Social Security, which (by the way) many public employees do not receive.