Pensions deliver $943 billion economic punchNews added by Benefits Pro on July 31, 2014
By Marlene Y. Satter
Defined benefit plans are helping pump billions of dollars more into the economy than the monthly pension checks collected by retirees.
So says a new study from the National Institute on Retirement Security, which calculated that DB plans supported about $943 billion in total economic output in 2012, the most recent year for which data was available.
The study also asserted that spending by pensioners supported 6.2 million jobs in the U.S., to the tune of some $306.9 billion.
The Washington, D.C.-based institute bills itself as a nonpartisan nonprofit, though its stance on pension plans is clearly out of step with many business interests and conservative groups.
Employers have been killing off defined pension plans for years now. Nearly 60 percent of companies surveyed last year said they have either frozen accruals for all participants or closed their defined benefit plans to new entrants.
In a webinar today, Diane Oakley, executive director of the institute, and Nari Rhee, manager of research at NIRS and the author of the study, Rhee pointed out that those 6.2 million jobs “exceed the number of jobs in the entire private construction industry, 5.6 million jobs in 2012.”
In the study, Rhee noted that, “in 2012 the national unemployment rate was 8.1%. The entire civilian labor force in the country consisted of 142.4 million potential workers, of whom 12.5 million were unemployed. In light of these numbers, the fact that DB pension expenditures supported 6.2 million jobs is significant, as it represents a full 4.4 percentage points in the national labor force.”
Another big finding in the study was that DB plans are more economically efficient than defined contribution plans, with 63.2 percent of benefits coming from investment earnings, not from employer or employee contributions. In addition, the institute’s research showed that pensions can provide the same level of retirement benefits at approximately half what a DC plan costs.
In pushing the case for DB plans, Rhee pointed out that in many cases over the past few years DB plans were being cut while at the same time municipalities were wooing such taxpayer-paid projects as new stadiums. “The academic literature is pretty clear that (stadium deals) are not a good taxpayer investment,” she argued. “They’re made for other reasons, but ROI and economic growth are not among them. DB pensions are a better investment for taxpayers.”
In an interview, Oakley said that governments and municipalities considering switching from a DB to a DC plan should look hard at “the change that they’re going to be making. How bad an impact will that have on retirees? And not just when people retire, but in recruiting a workforce and retaining them to protect property — police, firefighters” and other civil servants.
While public officials think switching to a DC plan will solve their underfunding problems, “the bottom line is that it doesn’t ... (but) it will lower benefits fairly substantially,” Oakley said. “Basically, what they’ll find is that pensions are cheaper than 401(k)s in providing the same level of retirement benefits. A DC plan makes an unfunded liability worse. It undermines retirement security, it’s more expensive, and it doesn’t close the funding gap.”
Retiree DB spending, on the other hand, benefits local, state and the national economies, she said.
DB spending in 2012 supported more than $135 billion in local, state and federal tax revenues, the institute said.
In addition, every dollar paid out in pension benefits supported $1.98 in total economic output, and every taxpayer dollar that was contributed to state and local pensions supported a total output of $8.06, it said.
On the other hand, those with only 401(k) plans may be reluctant to spend what they have in a downturn because they are not sure of how much money they will have in the future, the institute said. DB recipients spend their dependable income regularly, putting that money back into the economy, so they in turn more dependably support the businesses they patronize.
The study also calculated that in 2012:
Nearly $477 billion in pension benefits were paid to 24 million retired Americans, including:
• $228.5 billion paid to some 9 million retired employees of state and local government and their beneficiaries (typically surviving spouses);
• $70.7 billion paid to some 2.5 million federal government retirees and beneficiaries; and
• $175.6 billion paid to some 12.7 million private-sector retirees and beneficiaries.
Originally published on BenefitsPro.com
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