We’re fast approaching the three year mark of COVID-19 shutdowns in 2020 that reverberated through the United States and global economies. According to the International Monetary Fund (IMF), median global GDP dropped by 3.9% from 2019 to 2020, making it the worst economic downturn since the Great Depression.
All too well we remember that in the U.S., millions of workers were displaced from their jobs, resulting in anxiety, fear, and record-shattering unemployment insurance applications. Consumer and retail activity contracted sharply, with many businesses forced to close. Despite chronic political acrimony, there was quick bipartisan Congressional action that helped alleviate the economic fallout for families and provided economic stimulus. And while the global economy has somewhat stabilized, recovery has been uneven and inflation has been a lingering and painful economic aftereffect.
During this unprecedented global health and economic crisis, pension funds remained a stable and reliable source of income for retirees. More specifically, pension plans paid out $612.6 billion in retirement income to nearly 25 million public and private sector retirees in communities across the nation. Unlike retirees with 401(k) account balances that plummeted amid market volatility, retirees with a pension continued to receive a reliable and stable monthly income. And that meant pensioners could feel confident spending at the same rate despite the economic turmoil, while retirees lacking a pension likely were fearful of spending their nest egg.
What we saw in real-time during the pandemic was a long-known but little appreciated fact: pensions are more than financial security for individual retirees. Pensions have a substantial economic impact when retirees spend their pension income. When retirees receive their pension income, the money doesn’t just sit untouched in a bank account. Retirees typically spend their income on housing, food, medicine, at retailers, or online. This spending ripples through virtually every state and locality in America.
In fact, retiree spending of public and private sector pension benefits in 2020 was substantial, generating $1.3 trillion in total economic output. Yes, that’s trillion, not billion.
Moreover, this spending of retirement benefits supported nearly 6.8 million jobs across the nation, at a time when key industries were rapidly shedding jobs. The largest employment impacts occurred in the food services, health care, and retail trade sectors.
Pension spending also added nearly $157.7 billion to government coffers at the federal, state, and local levels, which was critically important especially at the state and local level. This tax revenue came from two major sources: taxes paid by beneficiaries directly on their pension benefits and taxes from expenditures in the local economy, like sales tax on retail purchases. Like for retirees, pensions remained a stable source of income for governments that were starved for revenue in the early days of the pandemic.
Since 2009, the National Institute on Retirement Security has calculated on a biennial basis the national economic impacts of U.S public and private sector pension plans. These economic impacts for 2020 are detailed in Pensionomics 2023, the latest update of the report. Each update quantifies the impact of public and private sector pensions in each of the 50 states and the District of Columbia using IMPLAN, a leading economic analysis model used by governments, businesses, academia, and researchers.
A related NIRS study indicates that pension dollars are especially vital for small and rural communities where other steady sources of income may not be readily found if the local economy lacks diversity. On top of the pandemic, many small towns and rural communities across America have another economic problem: shrinking populations. The economic analysis report showed the flow of benefit dollars from public pension plans in 2018 was a positive economic contributor to these smaller communities. That year, public pension benefit dollars represented between one and three percent of GDP on average in the 2,922 counties in the 43 states studied.
As we continue to reflect on the lessons learned from the pandemic, one point is clear: pension income not only sustained retirees during trying economic times, but provided critical economic support when we needed it most. Just one of many reasons why policymakers and employers are wise to safeguard pension plans.