Promoting freedom, innovation, and growth

Connect with IPI

Receive news, research, and updates

November 11, 2014

Benefit of Pensions Shown to Be Widespread

Variables Make Determining Cause of Premium Increases Difficult
IPI expert referenced: Merrill Matthews | In The News | Media Hit
  Government Finance Review

Defined benefit (DB) pension benefits not only provide a secure source of income for many retired Americans, they also contribute substantially to local, state, and national economies. DB pensions play a vital role in sustaining consumer demand that ultimately supports millions of jobs, according to the National Institute on Retirement Security (NIRS). The organization's new study, Pensionomics 2014, measures the economic impact of pension expenditures.

Most communities across the country benefit from the spending of pension checks. NIRS provides the example of a retired nurse residing in the State of Wisconsin who spends her pension check on goods and services in the local community. These purchases, combined with those of other retirees with pensions, create a steady economic ripple effect. In short, pension spending supports the economy and supports jobs where retirees reside and spend their benefits. Pension expenditures may be especially vital to small or rural communities, where other steady sources of income may not be readily found if the local economy lacks diversity.

NIRS also makes the point that reliable pension income can be especially important not only in providing retirees with peace of mind, but in stabilizing local economies during economic downturns. Retirees with DB pensions know they will receive a steady check despite economic conditions, while retirees with only defined contribution (DC) retirement plans may be reluctant to spend money from their accounts if their savings are negatively affected by market downturns. To the extent that DB pensions provide retirees with steady income available for spending regardless of fluctuations in the stock market, DB pensions may play a stabilizing role in the economy like Social Security, the study suggests.

Pensionomics analyzes data on DB pension plans in both the public and private sectors to assess the overall national economic impact of benefits paid by these plans to retirees. For state and local government pension plans, NIRS also analyzes these impacts at the state level for each of the 50 states and the District of Columbia.

The study finds that in 2012, U.S. state and local pension plans collectively held total assets of $3.1 trillion. They served 28.6 million Americans, including 14.4 million active participants, 5.2 million inactive members, and 9 million retirees and other beneficiaries receiving regular benefit payments. Benefit payments in 2012 totaled $228.5 billion, for an average benefit payment of $2,113 per month, or $25,354 per year.

Although private-sector DB plans have experienced a decline in recent decades (due in large part to a difficult regulatory environment), 12.7 mil- lion private-sector employees still had pension coverage in 2012, with an average benefit of $13,818.

* Expenditures made out of those payments collectively supported:

* 6.2 million American jobs that paid nearly $307 billion in labor income.

* $943 billion in total economic output nationwide.

* $555 billion in value added (GDP).

* $135 billion in federal, state, and local tax revenue.

DB pension expenditures have large multiplier effects. Each dollar paid out in pension benefits supported $1.98 in total economic output nationally.

The report is available at http://www.


The Center for State and Local Government Excellence 2014 report of state and local government pension funding finds that many plans are still recovering from the effects of the economic downturn. The paper, titled the Funding of State and Local Pensions 2013-2017, surveyed 114 state and 36 local plans.

Its key findings include the following:

* Despite a strong stock market, the funded status of public plans in 2013 remained unchanged at 72 percent for two reasons: actuarial smoothed assets grew modestly, and the California Public Employees Retirement System, one of the nation's largest plans, significantly revised its reported funded ratio.

* Funded levels among plans vary significantly.

* Many sponsors appear to be paying a larger share of their annual required contributions, an encouraging sign.

* There is slight improvement at the top: 6 percent are 100 percent funded or better, and 28 percent are more than 80 percent funded.

* Going forward, the funded ratio is projected to gradually move to greater than 80 percent assuming expected stock market returns.

The brief is available at


Determining how much of the increase in health-care premiums can be attributed to the Patient Protection and Affordable Care Act is tncky, the Institute for Policy Innovation reports. Increases are based on actuarial estimates which are educated guesses about factors including the estimated ratio of sick and healthy people in a particular insurance pool, the normal growth in health-care costs, and government regulations. New premiums can also be an attempt to correct for pricing errors the year before. Insurers also have an incentive to raise premiums by smaller amounts from year to year because the Department of Health and Human Services has warned insurers not to raise premiums by more than 10%; additional increases will be scrutinized. There are other variables, as well, which means that "trying to point to one or two insurers or states doesn't tell us much."

The report is available at



  • TaxBytes-New

Copyright Institute for Policy Innovation 2018. All Rights Reserved Privacy Policy Contact IPI.

e-resources e-resources