Pensions may seem like a relic from the past, but according to a new report they have the power to boost today’s economy.
For example, retirement payments helped maintain 6.8 million jobs in 2020 and $422.2 billion in earned income, according to a new study by the National Institute on Retirement Security using census data. They also provided $62.9 billion in federal tax revenue.
Overall, pensions provided $1.3 trillion in economic activity in that first year of the pandemic, when business conditions were uncertain.
The results highlight that, according to the study’s authors, annuities can provide more reliable returns to the economy than 401(k)s — particularly during recessions — even though 401(k)s are now the plan of dominant withdrawal offered at the workplace.
“When a retiree receives their monthly pension and knows they can count on it to last them for months to come, it has an impact on spending in their communities,” said Dan Doonan, executive director of the Institute. National on Retirement Security, “and on maintaining their standard. of life.”
HUNTINGTON BEACH, CA – APRIL 06: Ladies will be served lunch at The Longboard restaurant in Huntington Beach, CA on Tuesday April 6, 2021 with capacities starting June 15th. (Photo by Paul Bersebach/Orange County Register via Getty Images)
‘Multiplier effect’
The average pension payment in 2020 was $11,934 a year, or about $994 a month. Although the sum may seem small, those pension payments can stimulate a local economy through the “multiplier effect,” according to Ilana Boivie, senior economist at the International Association of Machinists and Aerospace Workers and author of the study.
For every dollar paid in retirement benefits, the study estimates that $2.13 is generated in the local economy.
“You get more than double your impact,” Boivie said.
That’s what it looks like. When a retired firefighter uses a retirement check to buy a new lawn mower, the owner of the local hardware store sees sales plummet. If several retired firefighters purchase lawn mowers, the owner may need to hire someone else to support that purchase.
“The new owner and employees then also spend that new money in the economy,” added Boivie. “That money keeps being recycled into the economy just because of that one check to a retiree.”
Customers sit at the counter waiting for their orders at the reopening of Langer’s Delicatessen restaurant in Los Angeles on June 15, 2021 when California reopens and lifts its Covid-19 restrictions. (Photo by Frederic J. BROWN/AFP) (Photo by FREDERIC J. BROWN/AFP via Getty Images)
Effects on work
According to the study, pensions supported many jobs in 2020, even as the industries that strengthened were hampered by the changing needs and business environment during the pandemic.
For example, pensions supported 662,188 jobs in hospitals, doctors’ offices and community care facilities.
“Unfortunately, if people spent money on COVID, it was on the hospital,” Boivie said.
Pension spending also bolstered the category of clerical and administrative support jobs, which were largely relocated to remote positions in the first year of the pandemic. Pension payments supported 678,678 jobs in this area, with employees receiving $42.25 billion in wages and bonuses.
Pension spending also boosted the restaurant industry, supporting 547,819 workers in limited-service restaurants and 227,553 in full-service restaurants.
“Before the pandemic, people were more likely to eat out,” said Boivie. “When the pandemic started, we ate takeout.”
Pension Spending in Future Recessions
A screen displays market information on the trading floor of the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., August 3, 2022. REUTERS/Andrew Kelly
The key differences between 401(k)s and annuities help explain why the latter can be a better economic driver, especially during a downturn.
401(k) and similar plans – collectively defined as defined contribution [DC] Plans — have employers and employees contribute funds. Retirees do not have a set pension amount, as it depends on how much they can put in during their retirement years and their retirement account balance, which varies with stock market trends. market.
With pensions – also known as defined benefits [DB] Plans – Funds are provided only by the employer and retirees receive a set amount of benefits each month. Defined benefit plans “tend to generate better investment returns than individual defined contribution accounts,” Boivie said.
“Many of the resources from 401(k)s may not be withdrawn,” Doonan added. “With [pension] He plans to retire, really all the dollars. They don’t go up and down with the general economy.”
This means that retirees with annuities can weather various economic conditions, including a recession, better than those who rely on a 401(k).
“In contrast to [401(k)] Money, even if your account didn’t have a hit, you can be afraid to spend that money because you don’t know what’s going on in the economy,” said Boivie. “You know a retirement check is coming so you can make the same purchases you did before the recession.”
Ella Vincent is the personal finance reporter for Yahoo Finance. Follow her on Twitter @bookgirlchicago
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