Over the past century, NYSLRS has provided pension security for retired public workers, whose spending has contributed to the economic strength and stability of their communities.
Currently, there are more than 384,000 NYSLRS retirees and beneficiaries living in New York. In every corner of the Empire State, NYSLRS retirees shop at local stores and patronize local businesses, which in turn helps create jobs. NYSLRS retirees also pay a hefty share of local taxes.
Spending by NYSLRS retirees provides something else for their communities: economic stability.
Because a NYSLRS pension is a defined-benefit retirement plan, retirees and beneficiaries receive a guaranteed monthly payment for life. Defined-benefit plans, which pay benefits based on a pre-set formula, differ from defined-contribution plans, such as a 401k, which are essentially retirement savings accounts.
Recipients of defined-benefit plans don’t have to worry about their money running out during retirement or a drop in their monthly income because of a dip in the stock market. They are better able to maintain their spending during economic downturns, which helps local businesses stay afloat during hard times.
That stability is particularly important in rural parts of the State, which are more susceptible to downturns because they lack the economic diversity of more-urban areas.
Defined benefit pension plans, including NYSLRS, provide retirement security for millions of Americans. Here in New York, NYSLRS pays out more than $10 billion in benefits each year to nearly 400,000 New York State residents. Much of that money is spent at home, contributing to local economies and supporting jobs.
What’s happening here is mirrored across the country. According to a study released by the National Institute on Retirement Security (NIRS) in 2021, defined benefit pension plans paid $578.7 billion to 23.8 million retired Americans, and those payments had a significant impact on the nation’s economy.
What Is a Defined Benefit Pension Plan?
A defined benefit pension plan provides a pension that is based on a preset formula that takes into account salary and years of service. Unlike a 401(k)-style retirement plan (also known as defined contribution plan), it is not based on how much you or your employer contribute to your retirement account. A defined benefit plan provides a fixed monthly payment at retirement and is usually a lifetime benefit.
With a defined contribution plan, the amount of money the employee has accumulated at retirement depends on the investment returns of their individual account. A market downturn, especially near retirement, can affect the value of their benefit. With a defined benefit plan, market risk is shared, so a downturn doesn’t affect the benefit.
Most importantly, defined benefit pension recipients don’t have to worry about their money running out during their retirement years.
Who Gets Defined Benefits?
Defined benefit pension plans were once much more common in the United States. Today, defined benefit plans are more commonly offered by public employers, though about 16 percent of full-time private sector employees had access to a define benefit plan in 2018.
Who received these benefits? According to the NIRS study:
$308.7 billion was paid to 11 million state and local government retirees and beneficiaries;
$105.9 billion was paid to 2.6 million federal retirees and beneficiaries; and
$164.1 billion was paid to 10.1 million private sector retirees and beneficiaries.
Employers Benefit from Defined Benefit Plans
Not surprisingly, the financial security provided by defined benefit plans has proved popular among workers. In 2019, the NIRS surveyed 1,100 public employees about their benefits. Most said retirement benefits are good tools for recruiting and retaining workers, and 86 percent said their retirement benefits are a major reason they stick with their jobs.
National Economic Benefits of Defined Benefit Plans
The $578.7 billion in pension payments generated spending that supported 6.9 million American jobs with paychecks totaling $394.2 billion, the study estimated. But the economic benefit didn’t stop there. This is because of what economists call the multiplier effect, the measure of the true impact of each dollar spent as it works its way through the economy.
The study found that each pension dollar paid had a $2.19 multiplier effect, which resulted in nearly $1.3 trillion in economic output. Real estate, food service, healthcare, and wholesale and retail trade were the sectors most impacted.
The study also noted that defined benefit pension payments have a stabilizing effect on local economies. Because they have a steady source of income, retirees with a defined benefit plan are less likely than retirees with defined contributions to curtail spending during economic downturns.
“These plans are a cost effective way to provide secure lifetime income for retired Americans and their beneficiaries after a lifetime of work. Moreover,” the study concluded, “DB pension plans generate economic benefits that reach well beyond those who earned benefits during their working years.”
A recent survey gauged how important retirement benefits are to state and local government workers, and the crucial role that pensions and other benefits play in recruiting and retaining workers.
In 2015, more than 19 million Americans worked for state or local
governments, according to U.S. Census Bureau data. Retirement benefits,
including defined benefit and defined contribution plans, were available to
most of those workers.
Last year, the National Institute on Retirement Security
commissioned a survey
of more than 1,100 public sector employees. Teachers, police officers,
firefighters and other public workers were asked questions on a variety of
work-related subjects, from job satisfaction to health care benefits. The
majority of public workers surveyed (86 percent) cited retirement benefits as a
major reason they stay in their jobs.
Defined Benefit vs. Defined
An overwhelming number (94 percent) of government employees
surveyed said pensions help attract and retain workers. The same percentage had
a favorable view of defined benefit pension plans.
As a NYSLRS member, you are part of a defined benefit plan, also known
as a traditional pension plan. Your pension is a lifetime benefit based on
years of service and earnings. It is not based on your individual contributions
to the Retirement System.
With defined contributions plans, such as 401(k)-style
retirement savings plans, the employer, employee
or both make contributions to an individual retirement account. The money in
the account is invested, and the amount the employee has at retirement is based
on investment returns. A market downturn can affect the value of the benefit
and employees risk outliving their money.
When Retirement Benefits Get Reduced
In an effort to cut costs, some state and local governments have replaced
defined benefit plans with defined contribution plans. But these moves have had
The Institute’s study cites the experience of Palm Beach, Florida,
which gutted its defined benefit plan. The town soon realized that it was
spending large sums to recruit and train new police officers, only to see them
move to nearby communities with better benefits. The town reconsidered and
improved its pension plan.
Then there’s the case of West Virginia, where officials found that switching to a defined contribution plan for teachers actually cost more money. Because the traditional pension plan stopped receiving contributions from new teachers and their employers, it became harder for the state to meet its pension obligations. After 14 years, the state went back to offering a defined benefit plan to all new teachers. Teachers already in the 401(k)-style plan were allowed to switch to the traditional plan, and 79 percent made the switch. State officials project that the return to a defined benefit system will save them $1.2 billion in the first 30 years.
Meanwhile, Alaska is still struggling with its decision to drop its defined benefit plan. A report by the Alaska Department of Public Safety cited “the inability to provide a defined benefits retirement system” as a factor in the “critically low staffing levels” for Alaska state troopers.
As a NYSLRS member, you are part of a defined benefit plan, also known as a traditional pension plan.
Your pension is based on a preset formula that takes into account your salary and years of service. It will not be based on your individual contributions to the Retirement System.
If you retire with a NYSLRS pension, you will receive a monthly pension payment for the rest of your life.
Defined Contribution Plans
Defined benefit plans are often confused with 401(k)-style retirement savings plans, which are defined contribution plans.
With a defined contribution plan, the employer, employee or both make contributions to an individual retirement account, and the money in the account is invested. In most cases, it is the responsibility of the employee to make investment decisions, or the plan may offer pre-packaged investment options. At retirement, the employee will have an account that includes the accumulated value of contributions and investment returns, minus any fees.
The amount of money the employee has at retirement is dependent on the investment returns of the individual account, so market downturns, especially near retirement, can affect the value of the benefit. The employee also can run the risk of outliving their savings.
NYSLRS’s Defined Benefit Plans
NYSLRS actually administers more than 300 retirement plans, but all are defined benefit plans and share certain features. NYSLRS plans: