Unpacking the economic impact of DB plans

Study reveals that every dollar of DB payouts generates $1.43 in economic output for Ontario

Unpacking the economic impact of DB plans

A recent study of DB pension plans’ economic impact offered a strong case for advocates of this pension model. A report by the Conference Board of Canada on behalf of the Healthcare of Ontario Pension Plan (HOOPP), OPTrust, and the University Pension Plan (UPP), found a wide array of knock-on benefits to Ontario’s economy generated by DB pension payouts. Notably the report found DB plans in Ontario contributed $34.6 billion to provincial GDP, generated more than $60 billion in economic output, and generated $17.4 billion in tax revenues.

Alan Chaffe, Associate Director of Economic Research at The Conference Board of Canada, explained some of the results and highlighted why DB plans appear to have an outsized impact on their local economies. He explored how plan sponsors can view these pension plans in the context of an aging population and hinted at future areas of exploration around the more specific regional impacts of DB pension plans.

“The report suggests and shows that there is a significant contribution that retirees generate in the economy. So whether we're looking at the impact of their spending on gross domestic product, the jobs that are created because of their spending, or even the tax revenues that are generated, it's quite a substantial impact,” Chaffe says. “I think it's important to highlight that not only are these DB pension plans providing retirees and their families with a predictable and stable stream of income, but they also are significant economic contributors.”

Chaffe noted that the study was only exploring the economic impacts of DB pension plan payouts, not the impact of DB plan operations — the salaries and spending associated with running these plans. He also highlighted why the GDP and economic output numbers diverge. GDP, he notes, does not ‘double count’ the various impacts of a piece of spending. Economic output, however, does. Using the example of purchasing a bicycle, GDP would measure the amount paid for that bike, while economic output would measure the amount paid for everything along the supply chain that led to that bike.

Looking at economic output, the report found that DP plan payouts generate an outsized impact to the tune of $1.43 for every $1.00 paid. Chaffe notes that this is driven by the compounding effect of spending by pension beneficiaries. While the study itself didn’t explore why DB plans have this significant impact, Chaffe notes that other research has highlighted the importance of secure income streams in retirees’ spending confidence. When a retiree has access to defined benefit pension payments, they may feel more confident about spending. They may lack the same concern that they will run out of money later in life and have less stress. That can help prevent the tendency to ‘over save’ and means that DB pension payouts are more likely to enter into the economy.

Because the research was solely limited to DB plans, Chaffe notes that there is no comparable study of the impact generated by defined contribution plan payments or independent retirement savings. Notably, however, the report found that the $42.7 billion in benefits paid out to 1.23 million Ontario retirees by DB plans accounted for 71 per cent of all retirement income from employer and personal pensions and savings plans in the province.

In assessing economic impact the study did not take into account the costs to employers in maintaining these plans. However, Chaffe notes that around 80 per cent of the payments from these plans are generated through investment returns. Another area the study didn’t explore is the regional impacts of these pension payouts in communities with a higher percentage of retirees. It’s a subject that Chaffe wants to explore in future.

Despite the economic impact of DB plans, the number of workers eligible for them is declining across Canada. Citing Ontario statistics, Chaffe notes that the number of employed workers with membership in a DB plan has fallen from around 35 per cent to around 26 per cent in the past 20 years. As plan sponsors across the country assess the challenging prospects of an aging population and large-scale retirements, Chaffe hopes that they will look not just at the cost of plans like these but at their wider outsized economic impacts.

“I think that that key takeaways from this report really should be how much economic activity is being generated because of these payouts to defined benefit pension plan members,” Chaffe says.

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