During the month of October, we at the National Public Pension Coalition are celebrating retirement security. Next week is National Retirement Security Week. We’ll have more to say about that in a series of blog posts next week. This week, we want to focus on the economics of pensions, the most secure form of retirement savings. On Monday we examined why defined benefit pensions cost less than 401(k)-style defined contribution plans. Today we want to highlight how public pensions support local economies and provide needed tax revenue for state and local governments.
One fact about pensions that critics conveniently ignore is that pension benefits are spent and that money goes back into local economies. This is a very important point, so it’s worth elaborating on. Public pension funds receive revenue from three sources: employee contributions, employer contributions, and investment earnings. The employer contribution — paid by school districts, fire departments, state government agencies, etc. — is the only source of taxpayer dollars that goes into a public pension fund. On average, taxpayers contribute less than a quarter of every dollar in benefits paid out from a public pension fund. The majority of revenue in a public pension fund comes from investment earnings.
When the money in a public pension fund is eventually paid out to retirees and other beneficiaries, they don’t just save that money or keep it stashed away somewhere. They spend it on food, medicine, housing, and other daily expenses. Many retirees live on a fixed income. They depend on their pension benefit to cover their daily needs. When retirees spend their pension benefit, where does that money go? Into their local economy. When pensioners spend their benefit, they are buying groceries at the local grocery store, purchasing their prescription drugs at the local pharmacy, paying their mortgage on their home (which supports the local real estate market). This money stays in place and can provide a strong countercyclical effect when the economy takes a downturn because pension benefits will continue to be paid and pensioners can help buoy local economies during rough times.
The National Institute on Retirement Security (NIRS) has run the numbers in their Pensionomics report. Using numbers from 2014 (the latest available figures), NIRS found that nearly $519.7 billion in pension benefits were paid to 24.3 million retired Americans in that year alone. This produced $1.2 trillion in total economic output nationwide, which supported 7.1 million jobs.
When reading those numbers, keep in mind that taxpayers only contribute about a quarter of revenue to a public pension fund. NIRS found that for every dollar taxpayers contribute through the employer contribution to the pension fund, that dollar eventually generated $9.19 in total economic output nationally. That single taxpayer dollar goes so far because it is combined with the employee’s own contributions and then invested by professionals. Those investments then earn additional revenue for the fund and when that money is eventually spent as a pension benefit by a retiree, it helps stimulate local economies. Taxpayers are getting a tremendous return on investment for their contributions to public pensions.
It’s not just local economies and the businesses operating in them that benefit from public pensions. State and local governments also benefit from public pensions through additional tax revenue collected. The National Conference on Public Employee Retirement Systems (NCPERS) recently asked the question: on net, do state and local governments receive more tax revenue from public pensions than they contribute? The answer, in almost all states, is yes.
According to the NCPERS report, in 38 states, those states collect more in tax revenue generated by public pensions than taxpayers contribute to the public pension plans. Some of the states where pensions are net-revenue-generators may surprise people who only read the doom-and-gloom coverage of public pensions: California, Illinois, Kentucky, New Jersey, Oregon, and Texas all receive more in tax revenue created by public pensions than taxpayers contribute to those same pension plans.
Public pensions support local economies and provide needed tax revenue to state and local governments. The economics are not hard to understand. Pension plans are not glorified savings accounts where employees and employers put money in and all they get at the end is what they put in. Their contributions are invested and they grow and this investment activity alone stimulates the economy and produces tax revenue. But it doesn’t just stop with investment. That money is paid out as pension benefits to actual human beings who spend it on things they need. Purchasing goods and services is the very basis of a consumer economy.
Protecting pensions is not just about protecting the retirement security of public employees who have earned their pensions through their service to their communities. It is also about protecting the health of local economies and the businesses that thrive in them. Protecting pensions is about protecting community and the idea that service to the community benefits everyone in the end.