Opinion

Defined benefit pensions crucial for economic health

Couple enjoying a lake in Rancho Santa Margarita, Orange County.(Photo: VG Photo, via Shutterstock)

As Americans confront the effects of a K-shaped recovery that is further enriching the wealthy even as low- and-middle income workers struggle to stay afloat, the chasm between Wall Street and Main Street has never seemed wider.

Finding ways to bridge that chasm and better spread the wealth that derives from investment earnings so that it creates broad public benefits remains one of this nation’s greatest economic challenges.

We do know it can be done when workers and their employers pool resources to invest in their future.

The study notes that only about 24 cents of each dollar paid in retirement benefits comes from employer contributions.

A report released this month in January by the National Institute on Retirement Security shows how one retirement instrument – defined benefit pensions – are effectively delivering Wall Street earnings into Main Street communities, supporting more than 395,000 jobs in California alone and creating $76.7 billion in economic impact in this state.

In recent years, much public discussion has been focused on pensions, particularly those afforded to state and local government workers. Critics have complained about the costs to government agencies to contribute to the retirement security of teachers, hospital workers, first responders and all manner of employees.

To date, however, the discussion has ignored the back-end benefits of public employee pensions. Not only do pension benefits provide life-sustaining income for 1.3 million state and local government retirees in California who receive on average about $3,100 a month, but they also boost the economies of the communities in which those retirees live.

The fact is, the great majority of the money those retirees are spending on housing, food, consumer goods and the other necessities of life is money that was earned on Wall Street and from other investment ventures.

The plain fact is that California taxpayers get a significant return on the money state and local agencies pay into their workers’ pensions

The study notes that only about 24 cents of each dollar paid in retirement benefits comes from employer contributions. The bulk of those benefits – 64 cents out of each dollar – was generated by investment earnings. The remainder, about 12 cents on the dollar, was contributed by the retirees themselves.

Those percentage that comes from employer contributions will further shrink in the future, as a pension reform law enacted in 2012 now requires that workers pay 50 percent of the combined employer-employee contributions to their pensions.

The plain fact is that California taxpayers get a significant return on the money state and local agencies pay into their workers’ pensions. Every dollar put in ultimately generates $6.40 in economic output across the state.

The economic benefits generated by retiree spending, the study concludes, are “broadly felt across various industry sectors in California.”

These benefits, it notes, can be “especially vital to small and rural communities when other sources of income may not be readily found.”

It should be noted that although the Dow Jones Industrial Average plummeted in March, it since soared by 63 percent to a record high in January.

It further points out that the security of defined benefit pensions produces a steadying impact on the economy in down times. Beneficiaries continue to spend regularly, even as high unemployment and economic uncertainty depresses other consumer spending.

Prudently managed pension funds such as CalPERS and CalSTRS are resilient, dependable contributors to both the retirement security of workers and the health of the overall economy. There are moments, such as last March after financial markets went into a post-COVID tailspin, when Chicken Little critics attempt to scare the public into doubting their solvency.

It should be noted that although the Dow Jones Industrial Average plummeted in March, it since soared by 63 percent to a record high in January. That has, of course, has been good for pension investments, but short-term returns are of little consequence to funds that have an infinite investment horizon.

What is of consequence is the long term. Over the last 10 years, CalPERS has experienced an annualized investment return of 8.5 percent; over the last 30 years, 8 percent.

Prudent management of California’s pension funds continues to provide retirement security for more than a million beneficiaries, and a healthy, steadying impact on California’s economy. These pensions are bringing investment earnings home to Main Street.

Editor’s Note: Ted Toppin is Chairman of Californians for Retirement Security, a coalition of more than 1.6 million public employees and retirees. 


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