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How Defined Benefit Pension Payments Support the Economy

Written by Ron Saathoff, Director of the IAFF's Pension Resource  Department

It’s no secret that public pensions are being attacked at local and state levels, while legislators continue to introduce – and in some cases – pass pension reform bills aimed at increasing member contributions, retirement age and service years and reducing benefits.

It’s also clear that these lawmakers want to balance their state or local budgets with these benefit reductions and outright elimination of defined benefit pension systems. But this short-sighted approach fails to address the positive affect that retiree (i.e., consumer) spending from pension income has on the economy.

Supporters of public pensions stress the need for defined benefit pension systems. A January 2011 report, “The Top Ten Advantages of Maintaining Defined Benefit Pension Plans,” by the National Conference on Public Employee Retirement Systems (NCPERS) notes that defined benefit plans help ensure an adequate standard of living throughout retirement and have a substantial bearing on state and local economies. 

This argument is echoed by Diane Oakley, Executive Director of the National Institute on Retirement Security (NIRS). During a hearing in July before the United States Senate Committee on Health, Education, Labor and Pensions, Executive Director Oakley testified on how defined benefit pension payments to retirees can help fuel the economy.

Oakley detailed the multiplier effect in which retirees with pension benefits can directly influence the economy by purchasing goods or services. She also examined how small communities without a large local industry depend – in part – on the steady stream of business that pensioners pump into the economy from their retirement income. For example, the Colorado Public Employees Retirement Association made pension benefit payments of $2.1 million in 2009 to its retirees in rural Costilla County, and those payments comprise 35 percent of the earned income in that Colorado county.

Information gathered by CalPERS  in an executive summary, “The Economic Impacts of CalPERS Pension Payments in 2010,” also noted several significant outcomes. According to the summary, in 2010 CalPERS paid nearly $12 billion in benefits to more than 500,000 retirees, beneficiaries and survivors.  Approximately 86 percent of those live in California and spend their monthly income in the state’s 58 counties. In addition, almost nine out of every 10 retirees from California continue to reside and spend their defined benefit income within their home state. As a result, every dollar paid out to CalPERS members generates $2.26 in economic activity statewide. 

Since almost 80 percent of retirement dollars paid to retirees is generated from their own contributions to the system and from investment earnings, the value of taxpayer contributions is increased by a factor of five. This means every dollar contributed by the taxpayer for retirement resulted in $10.79 worth of economic activity when it was paid out in benefits in 2010 by CalPERS.

Testimony from NIRS Executive Director Oakley and the 2010 CalPERS summary highlights the significant economic effect that pension payments generate. Retirees, who pay into these pension systems throughout their career, then have a steady income throughout their retirement. These retirees are an integral part of local, state and national revenue because of their contributions to the economy and tax base.

On the other hand, retirees receiving distributions from a defined contribution (401k) account alone will almost certainly have less money to spend and will likely outlive their benefits and have a good chance of becoming a liability to the local and state government. A February 19, 2011, article from the Wall Street Journal, “Retiring Boomers Find 401(k) Plans Fall Short,” explains that the median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain the same standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College. The story also notes that even factoring in Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings.

For more information on these and other pension related topics, visit www.iaff.org/pensions/index.htm.


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