Contrary to popular belief, defined benefit pensions are not only good for workers and taxpayers, they’re also good for the economy, generating significant amounts of economic activity nationally each year. According to a report released by the National Institute on Retirement Security, state and local public pension plans paid $253 billion to 9.6 million retirees and their beneficiaries in 2014, which then helped to support over 3.4 million jobs.
The report titled Pensionomics 2016 states that public pensions help create economic activity through the direct spending of pension benefits by retirees. This means that retired teachers, librarians, firefighters, and other public employees are not just saving their money; they’re putting it back into the local economy through their purchases. Local businesses are then able to support the wages of their employees and provide tax revenue for state and local government. NIRS calculates that the average economic impact of public pensions was 1.35. For every $1 paid in pension benefits, it generates $1.35 in economic activity.
While the impact varies from state to state depending on the size and diversity of their economy, a meaningful amount of economic activity has occurred throughout the country each year. Some highlights from the report:
- In Michigan, public pensions support over 77,000 jobs; in Pennsylvania, over 107,000.
- In Texas, every $1 of benefits paid from a public pension creates $1.61 in economic activity.
- In North Carolina, the “taxpayer investment factor” is 10.63. This means that for every taxpayer dollar contributed to a public pension fund, that dollar ultimately generates a whopping $10.63 in total economic output in the state.
Almost two-thirds of the revenue of public pensions comes from investment earnings. This is why the taxpayer dollar invested in a public pension fund has such an outsized impact. Instead of just sitting in a savings account for thirty years, the funds are managed and invested by professionals who work throughout that period to ensure their growth. Research has found that defined benefit pension plans earn higher investment returns than 401(k)-style defined contribution plans. Money contributed to public pension plans has a much greater economic impact than money contributed to 401(k)s.
Opponents of defined benefit pensions often point to the low annual investment returns of recent years as a major reason to gut these plans. But what they are forgetting is that pensions are long-term investments that have positive long-term effects on the economy. As the report states, pensions serve as important economic stabilizers during a downturn in the financial markets. Pension benefits will still continue to be paid, and retirees will continue to spend their benefit on necessary items like food and medicine, providing a much-needed source of direct spending during an economic downturn like the Great Recession.
Serving as a reminder of the true value of public pensions, the report highlights a number of important pension functions, including keeping retirees out of poverty and providing a boost to local economies.
During a time when some people have forgotten why pensions are good, it is important to remember why they were created over 100 years ago: they’re resilient and offer the most secure retirement for working families.
Tyler Bond is a program assistant at the National Public Pension Coalition.
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