The Ripple Effect: How a Paycheck Can Pack a Big Economic Punch

June 15, 2015

Almost seven years ago, the American economy entered the worst period of recession since the Great Depression. Millions of Americans were out of work, industry slowed to a crawl, and the US economy shrank for six consecutive quarters. During that time, and all the way up to today, a large focus was put on jobs and economic growth. It changed the way people thought about the value of various sectors of the economy. (By the way, over 1 million new jobs have been created in the first five months of 2015 according to the most recent jobs report.)

For instance, studies of the Denver Scholarship Foundation and the military’s economic impact on Colorado recently made news.

But what does it all mean? Even the short answer is, well, it's complicated.

Think of your paycheck like a pebble tossed into a pond. When your dollars are spent, they create a ripple that goes out into the broader economy. The more money someone earns, the more ripples they create, and those ripples can create more ripples. In economics, this is called the Multiplier Effect, and there are lots of numbers associated with figuring out how big of a multiplier certain flows of dollars have.

Dollars distributed in the form of payments to retirees—either in the form of a monthly pension or annuity, or a 401k or IRA—can have a bigger impact on local economies than normal paychecks. The reason for this is retirees tend to be in the decumulation phase of their retirement planning. They’ve spent their careers saving, and now they rely on those retirement dollars to pay for things like groceries, gas, and other living expenses.

Whether money being spent is coming from retirement payments or not, any time an infusion of dollars flows into a state or local community, the effects will be felt far outside individual transactions. When more dollars are spent at a family hardware store, for instance, the owners might need to keep up with that demand by hiring more help—they might even consider expanding to a second location. That growth is going to have its own ripple effect, not just on the local economy, but for state and local governments in the form of increased tax revenue.

PERA just released a study showing how important retirement distributions are to the state. You can find some of the highlights below, and make sure to check out the size of the impact in your region.