We are fast approaching the three-year mark of COVID-19-induced shutdowns in 2020 resonating with the United States and global economies. According to the International Monetary Fund (IMF), the median global GDP fell 3.9% from 2019 to 2020, making it the worst economic downturn since the Great Depression.
We remember very well that millions of workers in the US were laid off from their jobs, resulting in anxiety, fear and record-breaking unemployment insurance claims. Consumer and retail activities contracted sharply and many businesses had to close. Despite chronic political bitterness, there was swift bipartisan Congressional action that helped ease the economic fallout for families and provided economic stimulus. And while the global economy has somewhat stabilized, the recovery has been erratic and inflation has been a lingering and painful economic impact.
During this unprecedented global health and economic crisis, pension funds continued to be a stable and reliable source of income for retirees. More specifically, retirement plans have paid $612.6 billion in retirement income to approximately 25 million public and private sector retirees in communities across the country. Unlike retirees with 401(k) account balances, which fell due to market volatility, pensioners continued to have a reliable and stable monthly income. And this meant that retirees could feel confident to spend at the same rate despite the economic turmoil, while retirees without a pension were probably afraid to spend their nest eggs.
What we saw in real time during the pandemic was a long-known but underappreciated fact: Pensions are more than financial security for individual retirees. Pensions have a significant economic impact when retirees spend their retirement income. When retirees receive their retirement income, the money does not stand as it does in a bank account. Retirees often spend their income on housing, food, medicine, retailers or online. This spending fluctuates in almost every state and territory in America.
In fact, pension spending on public and private sector retirement benefits in 2020 was substantial, generating $1.3 trillion in total economic output. Yes, that’s a trillion, not a billion.
Moreover, this spending of retirement benefits supported nearly 6.8 million jobs nationwide at a time when key industries were losing jobs rapidly. The largest employment impacts occurred in the food services, health care and retail trade sectors.
Retirement spending also added approximately $157.7 billion to government coffers at the federal, state and local levels, which was particularly critical at the state and local levels. This tax revenue came from two main sources: taxes paid by beneficiaries directly on retirement benefits, and taxes on expenditures in the local economy, such as sales tax on retail purchases. Like retirees, pensions have continued to be a steady source of income for governments struggling with income in the early days of the pandemic.
Since 2009, the National Institute for Retirement Security has been calculating the national economic impact of US public and private pension plans every two years. These economic impacts for 2020 are detailed in the following sections: pension science 2023, last update of the report. Each update measures the impact of public and private 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 shows that pensions are particularly vital for small and rural communities where other sources of fixed income may not be readily available if there is no diversity in the local economy. In addition to the pandemic, many small towns and rural communities in America have another economic problem: declining populations. The economic analysis report showed that the flow of money from public pension plans in 2018 made a positive economic contribution to these small communities. That year, public pension dollars represented an average of one to three percent of GDP in 2,922 counties in the 43 states surveyed.
As we continue to reflect on the lessons learned from the pandemic, one point is clear: Retirement income has not only supported retirees during tough economic times, but has provided critical economic support when we need it most. It’s just one of the many reasons policymakers and employers are smart about protecting their retirement plans.