Earlier this week, I wrote about the economic efficiency of pensions in providing retirement income to individual workers. Defined benefit pensions have many advantages that make them more cost efficient than 401(k)s. Beyond the advantages for the individual saving for retirement, pensions also act as a means of economic stimulus in local communities. Pensions generate economic activity because retirees spend their pension benefit on food, health care, and housing in the places where they retire. On average, 61 percent or more of pension funding comes from investment returns. This means that over half of the money retirees are spending in their community is new money, not just deferred compensation from their working years.
401(k)s, on the other hand, do little to benefit the economies of local communities. A significant portion of the value of 401(k)s is lost to high management fees paid to financial firms. This benefits Wall Street, not Main Street. It’s now well-documented that 401(k)s do little to benefit the middle class, leaving many working families struggling to retire on inadequate savings. When seniors retire with insufficient savings, they may be forced to rely on food stamps and other government programs just to survive. Thus, instead of being an economic benefit to the community, 401(k)s are a cost to retirees and society.
In Missouri, the Public School Retirement System found that 90 percent of pension beneficiaries lived in state in retirement. “That’s a huge financial impact to the state,” said executive director Steve Yoakum. Missouri’s PSRS paid out $2.2 billion in 2014 alone.
In Louisiana, the Louisiana Budget Project analyzed the economic impact of pension spending in the parishes. Louisiana’s pension systems pay out roughly $3 billion a year, putting them on par with the state’s major industries in terms of economic impact. This impact is particularly significant in smaller, rural parishes.
Defined benefit pensions provide a safe and secure retirement for working families, but they do more than that. Because the investment returns on pensions are invested back in the local economy through retiree spending, pensions represent an important source of economic activity, particularly in more rural areas where retirees are more likely to live. This is in contrast to 401(k)s, which drain money from workers’ savings and send it up to Wall Street.