Pensions may seem like a relic of the past, but they can be a key factor in boosting today’s economy, according to a new report.
For example, pension payments helped support 6.8 million jobs in 2020 and $422.2 billion in work income, according to A new study from the National Institute for Retirement Security using census data. They also provided $62.9 billion in federal tax revenue.
Overall, annuities delivered $1.3 trillion in economic activity during that first year of the pandemic when business conditions were uncertain.
The findings underscore how annuities can provide a more reliable return to the economy than 401(k)s—especially in recessions—according to the study authors, even though 401(k)s are now the dominant retirement plan offered in the workplace.
“When retirees receive their monthly benefits and know they can count on them to continue in the months ahead, it affects spending in their communities,” said Dan Donnan, executive director of the National Institute for Retirement Security, “as well as maintaining their standard of living.”
Pension payments averaged $11,934 per year in 2020, or about $994 per month. Although the amount may seem small, these pension payments can boost the local economy through a “multiplier effect,” according to Ilana Boeve, chief economist of the International Association of Machinists and Aerospace Workers and author of the study.
According to the study’s calculations, for every dollar paid in pension benefits, $2.13 is generated in the local economy.
“You get more than twice as much impact,” Boivie said.
That’s how it looks. If a retired firefighter uses a pension check to buy a new lawn mower, the local hardware store owner sees sales skyrocket. If several retired firefighters purchase lawn mowers, the owner may need to hire someone else to support those purchases.
Boeve added, “The new owner and employees are spending that new money in the economy as well. That money is being recycled over and over through the economy just because of that one check to a retiree.”
According to the study, pensions supported many jobs in 2020 even if the industries they supported were distorted by the changing needs and business environment during the pandemic.
For example, annuities supported 662,188 jobs in hospitals, doctors’ offices, and community care facilities.
“With COVID, if people were spending money, it was unfortunately hospitalization,” Boivie said.
Pension expenditures also boosted the clerical and administrative job category, which moved largely to remote jobs during the first year of the pandemic. Annuity payments supported 678,678 jobs in the field, 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 go out to eat,” Boeve said. “When the epidemic started, we ate fast food.”
Pension spending in future recessions
The key differences between 401(k)s and annuities help explain why the latter is a better economic engine, especially during recessions.
401(k)s and similar plans – bundled together as a defined contribution [DC] Plans – Have employers and employees contribute funds. Retirees do not have a set retirement amount because it depends on how much they can contribute during their retirement years and on their account balance when they withdraw, which fluctuates with the performance of the stock market.
With annuities – also called defined benefit [DB] Plans – Funds are provided by the employer only and retirees have a set allotment amount each month. Boivie said defined benefit plans “tend to have better investment returns than individual identification contribution accounts.”
“A lot of resources may not be retired from a 401(k),” Donnan added. “With [pension] Plans, all the dollars really go into retirement. They don’t go up and down with the broader economy.”
This means that retirees with pensions can get through a variety of economic conditions, including recessions, better than those who rely on a 401(k).
“vs [401(k)] Money, even if your account isn’t affected, you might be afraid to spend that money because you don’t know what’s going on with the economy,” Boivie said. “You know the pension check is coming, so you can make the same purchases you were making before the recession.”
Ella Vincent is the Personal Finance Correspondent at Yahoo Finance. Follow her on Twitter @tweet