The U.S. economy is consumer driven! There is no arguing that fact, as nearly 70% of the U.S. economic output is driven by consumption. Well, then, what happens to a consumer driven economy when its citizens don’t have the financial wherewithal to consume? It tanks! Get ready for some rocky times ahead, as our future retirees don’t have nearly the same spending power as the older Baby Boomers and previous generations have had.
The demise of the defined benefit plan will have a meaningful impact on U.S. economic growth. Who says? We, at KCS do, but more importantly, the folks at the National Institute on Retirement Security (NIRS) do! They have just released their latest study, which looks at the positive impact on spending from the roughly 24 million recipients of monthly pension checks from 2014. The results highlight the significant contribution to our economy from those receiving a pension benefit. On the contrary, the loss of DB pensions being replaced by the underwhelming defined contribution account balances has the potential to depress economic activity. Here are the NIRS findings:
The NIRS report, “Pensionomics 2016: Measuring the Economic Impact of Defined Benefit Pension Expenditures”, finds that economic gains attributable to defined benefit (DB) pensions in the U.S. are substantial. Retiree spending of pension benefits in 2014 generated $1.2 trillion in total economic output, supporting some 7.1 million jobs across the U.S. Pension spending also filled government coffers, with retirees paying a total of $190 billion in federal, state and local taxes on their pension benefits and spending 2014.
“Household spending drives the U.S. economy, accounting for more than two-thirds of U.S. economic output. In fact, American retirees’ pension spending supported one-tenth of such economic output nationwide,” said Diane Oakley, NIRS executive director. “So it’s clear that the growing number of retired Americans must have adequate income for consumer spending that continues to drive our economy.”
Pensionomics 2016 comes at a time when economists are predicting dramatic drops in economic growth in the coming decades. A recent McKinsey Global Institute study indicates that factors including an aging workforce and declines in population growth could reduce economic growth by one-third in the U.S. and 40 percent globally.
“A stable and secure pension benefit that won’t run out enables retirees to pay for their basic needs like housing, food, medicine and clothing. It’s good for the economy when retirees are self-sufficient and regularly spend their pension income. Retirees with inadequate 401(k) savings and fearful of running out of savings tend to hold back on spending. This reduced spending stunts economic growth, which already is predicted to drop by one-third as the U.S. population ages,” Oakley explained.
The study finds that in 2014:
Nearly $519.7 billion in pension benefits were paid to 24.3 million retired Americans including:
$253 billion paid to some 9.6 million retired employees of state and local governments and their beneficiaries (typically surviving spouses);
$78.8 billion paid to some 2.6 million federal government retirees and beneficiaries; and
$187.9 billion paid to some 12.1 million private sector retirees and beneficiaries.
Expenditures from these payments collectively supported:
7.1 million American jobs that paid $354.8 billion in labor income;
$1.2 trillion in total economic output nationwide;
$627.4 billion in value added (GDP); and
$189.7 billion in federal, state, and local tax revenue.
Pension expenditures have large multiplier effects: Each dollar paid out in pension benefits supported $2.21 in total economic output nationally.
The National Institute on Retirement Security is a non-profit, non-partisan organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers, and the economy as a whole. Located in Washington, D.C., NIRS’ diverse membership includes financial services firms, employee benefit plans, trade associations, and other retirement service providers.