Retirees in the Poor House?

Peru 2010_0586

There are so many news articles about poor retirees that it would be nearly impossible to count them. In opposition to that trend is an opinion article (may be behind a pay wall) in Friday’s (Jan. 24) Wall Street Journal. Sylvester J. Schieber and Andrew G. Biggs, both of whom have deep experience with Social Security, report a serious data problem with many estimates of retirement income.

Here’s the thesis: the common narrative “about the declining income prospects of retirees is not true.”

Why? Because most stories about the declining income prospects rely on data published in the Current Population Survey (CPS) by the Census Bureau, and those data do not include “most of the income Americans derive from 401(k) and IRA plans, … “

The Census Bureau’s definition of income includes only payments made on a regular, periodic basis. Monthly pension or annuity payments are included, but ad hoc, occasional or irregular withdrawals are not. Pensions are disappearing and private annuities are not commonly purchased by retirees (an earlier blog post reported on a 2007 study saying that only 12% of retirees buy annuities).

Most retirees, then, take ad hoc, occasional or irregular income from their 401(k)s and IRAs, and that income isn’t included in the CPS numbers.

Schieber and Biggs go on:

The misperception about retirement income becomes clearer when other data are taken into account. For 2008, the CPS reported $5.6 billion in individual IRA income. Retirees themselves reported $111 billion in IRA income to the Internal Revenue Service. The CPS suggests that in 2008 households receiving Social Security benefits collected $222 billion in pensions or annuity income. But federal tax filings for 2008 show that these same households received $457 billion of pension or annuity income.

These differences are large. Schieber and Biggs estimate that tax data show that households with pension income receive about 50% more than the CPS suggests.

The authors say that the Social Security Administration has known of the growing importance of the discrepancy for at least 20 years, but they continue to publish their summary report based on CPS data. They know that their summary report often serves to justify increasing Social Security payments and moving away from private 401(k) and IRA retirement plans.

Social Security’s own policy analysts have reported the discrepancy. The Office of Retirement and Disability Policy in 2012 published a study entitled, “Shifting Income Sources of the Aged.” That study concluded that the CPS “greatly underreports distributions from DC [defined contribution] plans and IRAs, posing an increasing problem for measuring retirement income in the future.”

We all need to check the data source when we see estimates of current retirement incomes. If the CPS or Current Population Survey by the Census Bureau is the source, then the estimates are likely large understatements of income.

The authors’s conclude that political proposals for increasing Social Security benefits are usually founded on inaccurate data. Income from retirement savings is much higher than most of us appreciate.

I’ve not been aware of this data trap. Luckily, I do not think Later Living has fallen into it. Perhaps it’s because I know that older people have fared better in recent years than other age cohorts. Maybe it’s also because I’ve known retirees to live well on $15,000 per year. Living well isn’t primarily about money.