Pensionomics 2012: Measuring the Economic Impact of DB Pension Expenditures

By Illana Boivie, National Institute on Retirement Security

Editor’s note: The work of the National Institute for Retirement Security (NIRS) strikes a cord with me, being a CFA and having managed pension and other investment portfolios in a previous life.

For retirement security, a majority of a middle-income individual’s income needs to derive from lifetime income sources. The private sector defined contribution system is beginning to include individual lifetime payout options in investment menus, but these individually-arranged, mostly retail-priced options come with high cost. The defined benefit (DB) pooled approach, along with its long-term, lower-cost infrastructure during both accumulation and distribution, might not be something our country should be striving to discontinue, but rather reconsidering its use. Defined benefit pension benefits are highly valued by those retired Americans who count on these plans for a secure source of income in retirement, and the economic contribution made to the state and local communities populated by public pension recipients is impressive. This study was published in March, 2012 using 2009 data. This is an excerpt from a longer research report.


The benefits provided by pension plans have an impact that reaches well beyond the retirees who receive pension checks.

For state and local plans, we analyze these impacts on a national level as well as in each of the fifty states. The economic gains attributable to DB pension expenditures are quantifiable. This study finds that, in 2009:

• Over $426 billion in pension benefits were paid to nearly 19 million retired Americans. Of that:

» $187 billion was paid to some 8 million retired employees of state and local government and their beneficiaries (typically surviving spouses);

» $67.6 billion was paid to some 2.5 million federal government beneficiaries;

» $171.5 billion was paid to some 8.4 million private sector beneficiaries.

• Expenditures made out of those payments collectively supported:

» 6.5 million American jobs that paid nearly $315 billion in labor income;

» $1 trillion in total economic output nationwide;

» $553 billion in value added (GDP);

» $134 billion in federal, state, and local tax revenue.

• DB pension expenditures have large multiplier effects:

» For each dollar paid out in pension benefits, $2.37 in total economic output was supported.

» For every taxpayer dollar contributed to state and local pensions, $8.72 in total output was supported nationally.

• The largest employment impacts were seen in the food services, real estate, health care, and retail trade sectors.

Defined benefit (DB) pension plans have existed in the United States since the 19th century.

In the private sector, the first defined benefit (DB) pension plan was introduced in 1875 by the American Express Company.1 Over time, many private sector employers saw the value of offering DB pension coverage to their employees, as these benefits not only were quite valued by workers, but from a human resource management perspective, they also acted as an effective recruitment and retention tool.2 Although private sector DB plans have experienced a decline in recent decades (due in large part to a difficult regulatory environment),3 in 2005, 33% of private sector employees still had DB pension coverage.4

In the public sector, Congress created the Civil Service Retirement System (CSRS) to provide a pension for civilian federal employees in 1920. In 1986, Congress implemented the new Federal Employee Retirement System (FERS), which includes Social Security, a DB annuity, and a 401(k)-type savings plan, called the Thrift Savings Plan.5 On the state and local level, employee pension systems began to take root on a large scale during the Great Depression. When Social Security was established in 1935, the system left out state and local workers, and many states acted to develop their own retirement systems for their employees. Between 1931 and 1950, nearly half of the large public employee pension plans existing today were established; 45 states had retirement systems in place by 1961.6

In 2009, state and local pension plans in the United States collectively held total assets of $2.5 trillion. They served 27.5 million Americans, including 14.8 million active participants, 4.6 million inactive members, and 8.0 million retirees and other beneficiaries receiving regular benefit payments. Total benefit payments in 2009 were $187 billion, for an average benefit payment of $1,950 per month, or $23,407 per year.7

Federal pension plans currently serve 2.3 million active civilian employees.8 In 2009, Federal plans paid out some $67.6 billion in pension benefits to 2.5 million retirees and beneficiaries.9 Private sector pension plans covered 44 million Americans,10 including 8.4 million retired Americans in 2009.11 With total plan assets of $2.2 trillion in 2009,12 private DB pensions paid out some $171.5 billion in pension benefits to these retirees and beneficiaries.13 The average private sector pension benefit was $1,691 per month, or $20,298 per year.

Table 1. Public and Private Sector Pension Benefits, 2009

DB plans are prefunded systems, which means that a retirement fund receives regular contributions for each employee during the course of that person’s career. This type of arrangement can be contrasted with “pay-as-you-go” systems like Social Security, whereby contributions of current employees are used to pay benefits for current retirees. Prefunded retirement systems have the advantage that investment earnings can do much of the work of paying for benefits. In such a system, the contributions made on behalf of current employees are invested, and these investment earnings compound over time. Over a span of decades, accumulation of investment earnings can be substantial, and in many cases pay the majority of the pension benefits.

In state and local government pension plans, typically both the employee and employer make contributions to the pension fund. Pension fund trustees have a fiduciary duty to ensure that the retirement fund is operating in the best interest of workers and retirees, and hire professional managers to oversee fund investments.14 In this respect, public plans differ from private sector DB plans, which are generally funded solely by employers.

DB pensions are distinguishable from defined contribution (DC) plans (like 401(k) plans) in that they provide broad-based coverage, secure money for retirement, a lifetime income, and special protections for spouses.15 Even after accounting for all of the significant advantages of a DB retirement system over DC accounts, research shows that DB plans are more economically efficient than DC plans. Pensions can deliver the same level of retirement benefits at nearly half the cost of a DC plan.16

State and local pension fund receipts come from three sources: employer contributions, employee contributions, and earnings on investments. Figure 1 shows that between 1993 and 2009, 27.1% of public pension fund receipts came from employer contributions, 14.0% from employee contributions, and 58.9% from investment earnings. Earnings on investments—not taxpayer contributions—have historically made up the bulk of pension fund receipts, even though this time period saw two very large market downturns within a single decade.

Aggregate state and local pension contributions by source 1993-2009, Pensionomics 2012 repor

Aggregate state and local pension contributions by source 1993-2009, Pensionomics 2012 report

Just as contributions from employees and employers have an expanded impact through the compounding of investment earnings over time, a similar dynamic occurs when retirees spend their pension checks. When a retiree receives a pension benefit, the money does not go under a mattress. Rather, the retiree spends it on goods and services in the local community. These expenditures have a “ripple effect” in the economy, as one person’s expenditures become another person’s income. Analyzing the size and nature of these ripple effects is the goal of our study.

Measuring the National Economic Impact of DB Pension Plans

This study measures the economic impact of pension benefits paid by public and private pension plans nationally, as well as the economic effects of state and local plans within each state economy. Our analysis rests on the recognition that expenditures have a “multiplier” effect in a regional or national economy. When money is spent at a local business, that business sees an increase in revenue, thus boosting the economy initially. But that initial purchase generates even more local income, as shop owners will spend more money at other local businesses, purchasing more input goods to make additional products. Then, those input business owners will also spend more money in the local economy to increase their production, and so on. Additionally, with the increase in revenue, local merchants may hire extra workers, further fueling the local economy. Thus, with each new round of spending, additional revenue is generated, expanding job creation, incomes, total output, and tax revenue to the local community, as illustrated in Figure 2.

Our analysis is focused on the expenditure effects of pension benefits, measuring the economic impacts that result when expenditures made by retirees ripple throughout the economy. Because pension benefits are permanent sources of income— in that they cannot be outlived—we would expect the economic impacts to be larger than those of temporary income increases.17 For this reason, we would expect the economic impacts of pension benefit expenditures to be larger than those out of, for example, unemployment insurance benefit payments. It should also be noted that this study measures the gross economic impacts of pension benefit expenditures, rather than the net economic impacts. (For a detailed explanation, see the Technical Appendix of the report).


DB pension plans provide a critical source of reliable income for 18.9 million Americans. These plans are cost effective way to provide broad-based coverage, secure money for retirement, a lifetime income, and economic protections for retired Americans and their beneficiaries after a lifetime of work.

Often overlooked is the significant economic impact of DB pension plans, which reaches well beyond those who earned benefits during their working years. Because pensions supply secure income to retirees, pensions provide local economies with stable sources of revenue. Retirees who spend their paychecks regularly in their local economies—especially during tough economic times—are providing a stimulus to local business revenues and local workers’ incomes.

These economic gains are quantifiable. Nationwide, over $1 trillion in total economic output was attributable to DB pension expenditures in 2009. DB expenditures supported 6.5 million American jobs that paid $314.8 billion in income to other Americans in that year. Benefits paid by DB pensions supported $134 billion in tax revenue at the local, state, and federal levels.

In supplying a stable source of income to retirees, DB pension plans support the national economy, as well as local economies throughout the country, with jobs, incomes, and tax revenue. Especially in these times of financial crisis and economic instability, pension benefits play an important role in providing a stable, reliable source of income not just for retired Americans, but also for the local economies in which their retirement checks are spent.

The National Institute on Retirement Security is a non-profit research institute established to contribute to informed policy making by fostering a deep understanding of the value of retirement security to employees, employers, and the economy as a whole. NIRS works to fulfill this mission through research, education, and outreach programs that are national in scope. Find this and many other informative resources at This excerpt is used with permission.

1     Seburn, P.W. 1991. Evolution of employer-provided defined benefit pensions. Monthly Labor Review, 16-23.

2     For a full discussion see Boivie, I., and C. Weller. Forthcoming in 2012. How DB plans influence labor relations in the wake of the Great Recession. Labor and Employment Relations Association Research Volume, 2012.

3     Boivie, I. 2011. Who Killed the Private Sector DB Plan? Washington, DC: National Institute on Retirement Security.

4     Munnell, A.H., Haverstick, K., and Soto, M. 2007. Why Have Defined Benefit Plans Survived in the Public Sector? State and Local Pension Plans Number 2. Chestnut Hill, MA: Center for Retirement Research at Boston College.

5     For more information on FERS, see Oakley, D. Forthcoming in 2012. Origins of the Federal Retirement Systems and the Thrift Savings Plan. Washington, DC: National Institute on Retirement Security.

6     Clark, R.L., L.A. Craig, and N. Ahmed. 2008. “The Evolution of Public Sector Pension Plans in the United States.” Wharton Pension Research Council Working Paper. WP 2008-16. Philadelphia PA: University of Pennsylvania.

7     U.S. Census Bureau. 2009. State and Local Government Employee-Retirement Systems. Washington, DC: U.S. Census Bureau.

8     U.S. Congressional Budget Office. 2012. Comparing the Compensation of Federal and Private-Sector Employees. Washington, DC: CBO.

9     U.S. Office of Personnel Management. 2010. Federal Annuity Roll. Washington, DC: U.S. OPM.

10 The Pension Benefit Guaranty Corporation. 2010. Pension Insurance Databook 2009. Washington, DC: PBGC.

11 U.S. Bureau of Labor Statistics Current Population Survey. 2012. Annual Social and Economic (ASEC) Supplement. Source of Income in 2009-Number with Income and Mean Income of Specified Type in 2009 of People 15 Years Old and Over by Age, Race, and Hispanic Origin, and Sex. Washington, DC: U.S. BLS.

12 Investment Company Institute. 2011. The U.S. Total Retirement Market, Third Quarter 2010. Washington DC: ICI.

13 U.S. Bureau of Labor Statistics Current Population Survey. 2012. Annual Social and Economic (ASEC) Supplement. Source of Income in 2009-Number with Income and Mean Income of Specified Type in 2009 of People 15 Years Old and Over by Age, Race, and Hispanic Origin, and Sex. Washington, DC: U.S. BLS.

14 Many studies have shown that professional investment managers achieve higher returns than individual, nonprofessional investors, including: Watson Wyatt. 2008. Defined benefit vs. 401(k) plans: Investment returns for 2003-2006. Insider, 18(5). Flynn, C., and H. Lum. 2007. DC Plans Underperformed DB Funds. Toronto, ON: CEM Benchmarking, Inc. And Towers Watson. 2011. DB vs. DC plan investment returns: The 2008-2009 update. Insider, 21(4).

15 Almeida, B. 2008. Retirement Readiness: What Difference Does a Pension Make? Washington, DC: National Institute on Retirement Security.

16 Almeida, B., and W. Fornia. 2008. A Better Bang for the Buck: The Economic Efficiencies of Defined Benefit Pension Plans. Washington, DC: National Institute on Retirement Security.

17 For further explanation of the multiplying effects of different types of expenditures, see, for example, Hoover, K.D. 2012. Applied Intermediate Macroeconomics. New York: Cambridge University Press.

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