Friday, March 21, 2008

How dependent are retirees on Social Security?

Warning: This post is long.

In discussions of the role Social Security plays in providing retirement income, one will often hear some variant of the following: Social Security

is the major source of income (providing 50% or more of total income) for 66% of the beneficiaries. It contributes 90% or more of income for one-third of the beneficiaries and is the only source of income for 22% of them.”

These are official SSA statistics. Perceptions of Americans' dependence on the Social Security program help influence views regarding the shape of possible reforms. For that reason, as well as others, it is important to have a clear idea what these statistics mean.

The interpretation of these statistics, and their sensitivity to alternate formulations, are the subjects of an important series of papers in the Social Security Bulletin by Lynn Fisher, an economist at the Social Security Administration.

Fisher shows that commonly used figures regarding seniors' dependency on Social Security rely on a series of measurement decisions, any of which could reasonably be decided in other ways. Using plausible alternate methodologies, the percentage of seniors entirely dependent on Social Security – around one-in-five, by the standard measure – could be as low as 3.5 percent.

Fisher examines four potential sources of bias in how we measure dependence on Social Security benefits:

  • Unit of measurement: do we count "elderly units" or individuals?
  • Benefit reporting: do we use self-reported benefit levels or rely on government data?
  • Asset income: do we include only regular income payments, irregular payments such as IRA or 401(k) withdrawals, or even assets that can be liquidated to produce income?
  • Non-cash benefits: Should we include non-cash benefits such as energy, food or housing assistance?

Any number of reasonable answers can be made to these questions. What is important is that people understand these choices when they ask "How dependent are retirees on Social Security?"

Unit of measurement: The SSA measures of dependence are expressed in terms of “aged units.” Aged units treat each marital unit (married couple or nonmarried individual) as one unit. A non-married individual has only his or her own income and demographic attributes.

How can this affect measured levels of dependence on Social Security? In two ways. First, single individuals tend to have lower incomes, and therefore be more dependent on Social Security, than do married couples. However, since both a single individual and a married couple count as one unit, this can overstate the percentage of individuals who are dependent on Social Security. For instance, if a single person was entirely dependent on Social Security while a married couple was not, on a ‘aged unit’ basis 50% would be wholly dependent on Social Security while on an individual basis only 33% would be.

Second, a non-married individual may share a household with other individuals, but the aged unit does not include the resources of these non-married cohabitants. (Thus, the ‘aged unit’ measure is not as broad as a ‘household’ measure.) If non-married cohabitants share incomes and costs, this can cause overstatement of unmarried individuals’ dependence on Social Security.

Using the individual as the unit of reporting and assuming that family income is shared, the percentage of seniors wholly dependent on Social Security drops from around one-fifth to around 13%.

Asset income: As the pension world shifts from traditional defined benefit plans to defined contribution plans, in which individuals would draw down their account balances to fund retirement expenses, one would expect that the share of seniors reporting asset income would increase. The measured percentage has actually decreased from 1991-2000, but this may be due to the limitations of the CPS survey data SSA uses in its calculations of Social Security dependency. Fisher turns to another survey – the Federal Reserve’s Survey of Consumer Finances, which emphasizes measures of asset holdings, to supplement existing data.

Fisher found that SCF data supported the view that receipt of asset income had remained roughly constant from 1991-2000. From this improved measure of asset holdings, she was able to infer receipt of asset income. This previously unreported asset income was relatively small, but concentrated among lower earners. While it does not greatly affect the average level of dependence on Social Security, it would lower the percentage wholly reliant on the program, from around 20% to around 10%.

Survey data: Fisher examines two issues dealing with data. First, how the Census Bureau’s Current Population Survey (CPS), which SSA uses to calculate its dependency statistics, compares to the Survey of Income and Program Participation (SIPP), another Census survey that can be used to calculate the income of the aged. Second, Fisher examines how results differ when survey data regarding receipt of Social Security benefits is replaced with administrative data.

Survey choice: The SSA dependency data are derived from the Census Bureau’s Current Population Survey (CPS). One advantage of the CPS is that a new survey is conducted annually, allowing for more up-to-date data. Another Census survey, the Survey of Income and Program Participation (SIPP), is conducted less frequently but asks more detailed questions. Survey subjects are asked about 70 sources of income, versus 35 in the CPS, and the survey takers check back with subjects four times per year, versus only once in the CPS. The SIPP also asks detailed questions about financial assets, while the CPS does not.

Administrative data: SSA’s figures regarding dependency on Social Security use self-reported levels of Social Security benefits contained in the CPS survey. However, researchers have matched CPS survey results to SSA administrative files to see how accurately individuals can recount their Social Security benefits. For a number of reasons, individuals misreport their Social Security benefits – confusing them with SSI or other benefits; reporting them net of Medicare Part B premiums, etc.

Taken together, using both the SIPP survey data and matching survey findings to administrative data and reduce reported dependence on Social Security benefits. Using 1996 survey data, Fisher found that the percentage 100% dependent on Social Security using the CPS with self-reported benefits was 17.9%; add administrative data to the CPS and dependence fell to 17.3%; use the SIPP survey with self-reported benefits and 100% dependence fell to 8.5%, and using SIPP matched to administrative records dependence fell to 8.4%.

Effects in combination: Fisher examines a number of different methodological questions separately, the sees how they affect measured dependence on Social Security when used in combination. Table 1 provides details: Combining all the issues discussed above and applied to 1996 data, the percentage of individuals over 65 depending on Social Security for 100% of their income declined from 17.9% to 4.8%. The percentage depending on Social Security for 90% of their income declined from 30.4% to 13.7%.

In an appendix, Fisher explores the effects of including non-cash benefits, such as food stamps or housing or energy assistance. These are not cash, but are nevertheless valuable resources. If non-cash benefits are included, the percentage wholly reliant on Social Security declines to 3.5%.

As we consider potential reforms to the Social Security program, it is important to have good information regarding the retirement incomes of current seniors, and for policymakers to understand what existing information really means. Put another way, if someone asks the qualitative question, "What percentage of seniors are totally dependent on Social Security?", the answer can range from as high as 20% to under 4%. The two different answers may well lead to two different policy conclusions.


Anonymous said...

i am constantly amazed by the ingenuity, not to say hard work, of those determined to undermine Social Security.

once again we have an abstract theoretical "study" designed to "prove" or at least suggest that Social Security is not important, if not a bad idea, if not a postive threat to the future of humanity.

well, you have to do what you get paid to do i guess.

but wouldn't it be nice if we could just be honest about, say, the cost of continuing social security (projected 20 dollar a week tax increase in 2040 when the average wage will be 1000 per week, 300 dollars more than today, in order to pay for an extra six years in retirement at the present average 40% replacement rate. explain this to the people and let them decide if it is "worth it" to them?

better than having the paid "non partisan experts" telling the politicians distorted facts and proposing rube goldberg solutions designed to put more money in the hands of the people who already have too much money while destroying the security of the working people.


Anonymous said...

i was too kind.

to see how cynical this is, consider

"In an appendix, Fisher explores the effects of including non-cash benefits, such as food stamps or housing or energy assistance. These are not cash, but are nevertheless valuable resources. If non-cash benefits are included, the percentage wholly reliant on Social Security declines to 3.5%."

see, if old folk are getting food stamps, they are not ENTIRELY dependent on Social Security. so we can tell the public "only 3.5% of retirees depend on social security".

damn those greedy geezers eeking out their food stamps with Social Securty benefits

that they paid for themselves.

sound like we need another call for high paid economists who can tell us that cutting social security benefits by a third will leave them "really" 20% higher in "real" value than they are today.

and because social security benefits are so generous today, we can be sure that future retirees would be glad to cut their future benefit from 1000 dollars a month to 700 dollars a month in order to save 75 dollars a month in social security taxes out of an income of four thousand dollars a month.

after all they can always make it up with food stamps. and talking to the food stamp worker (government proctologist) to prove they don't have hidden assets will be a welcome break in their boring days.


Andrew G. Biggs said...

Well, for whatever it's worth:

a) The study isn't 'theoretical', but rather an analysis of survey data, which is where the original figures come from. I don't think any serious analyst would dispute that the numbers as stated are correct.

b) I have no reason to believe the author has any particular policy agenda that drove the analysis.

Anonymous said...

funny how "theoretical" creeps into the most dispassionate analysis.

i find it really hard to believe that someone discovers that many Social Security receipients also get foodstamps and proposes using that "fact" to introduce "only 3.5% of elderly "units" are entirely dependent on Social Security" as an important point in policiy considerations... who doesn't have a policy agenda.

ah, but are we being cute again... "that drove the analysis" ? are we saying the numbers just happened to come up. no fudging necessary?

well, i am not claiming the numbers were fudged. i am claiming they are being used cynically. but that's only theoretically, driven by my policy agenda.

Andrew G. Biggs said...

If you read the full post, or the papers they link to, you'd see that the inclusion of non-cash benefits had only a tiny effect on the overall results. The baseline was that around 20% of seniors were wholly dependent on Social Security benefits for their income. That number had fallen by 3/4, to 4.8%, before non-cash benefits entered the picture.

Anonymous said...


i guess my point is that social security was never intended to be a person's entire income in retirement.. except of course in some cases where that's just the way it works out.

now, no doubt there are people from time to time saying... SS is the "sole income" of x number of people, and you would like to refute that.

but the whole argument is an elaborate way of missing the point. in fact a way of distracting attention from the point.

social security provides a guaranteed floor to the retirement income of working people. a very large number of working people. and even if, say (i am making this up) half of retirees get half of their income from something other than social security, this really has no relevance to policy.

because, the other "fact" about social security that you like to distract people's attention away from is that they people who pay the tax get the benefits. or to put that another way, the people who get the benefits paid the tax.

i think i understand that higher income wage earners these days can see that the opportunity cost of their social security is more than they want to pay. and as long as you don't get a stroke and lose that high paying job halfway through your career, you might have a point.

meanwhile Social Security provides a floor to the retirement income of workers, that they pay for themselves.

Anonymous said...

being always sensitive about possibly misreading, i read it again.

and i find that you are impressed that, gosh, only 13% of folks depend on SS for 90% of their income.

could this mean that along with their 500 dollar SS check, they get 50 bucks a month from some other cash source. well, i guess that means we can relax our policy choices a bit.

you see, the whole "long" post doesn't really discuss how dependent people might be on their Social Security... only whether or not a clever economist can find a way to show that not many of them are ENTIRELY dependent. Or, to give you the benefit of a doubt that i don't have... lets say those 66% of beneficiaries who only depend on Social Security for "half" their income. Lets say their SS is 500 bucks a month, and they get another 500 bucks from an employer pension. Now the question is "do they DEPEND on that SS" ?

entirely? well... no....

heck they can always cut their food intake in half, and pay only half the rent, and...

yes... i can see where this is an important finding for policy discussions.

can't have those people paying that huge social security tax just so they can collect those huge social security benefits.

Anonymous said...


i love the "elderly units" concept

right up there with "legacy debt"

and boskins overstated cpi.

can't have poor people getting uppity.

even if they paid for it themselves.

Bruce Webb said...

"In an appendix, Fisher explores the effects of including non-cash benefits, such as food stamps or housing or energy assistance. These are not cash, but are nevertheless valuable resources. If non-cash benefits are included, the percentage wholly reliant on Social Security declines to 3.5%."

Throw in discounted bus passes, senior rates for afternoon movie matinees, and Early Bird specials at their cash equivalent value and we could probably drive that percentage to zero.

Having been on the receiving end of many a manufactured Social Security taking point it is kind of fascinating watching one being created right in front of my eyes. "Gosh only 3.5% of people are wholly dependent on Social Security, the other 96.5% are just free riders"

100% dependency is kind of a bogus measure, what you would want to see before basing any kind of policy on this is the distribution away from 100%, how many people fall into the 95-99% range, how many in the 90-99% range and so on and that further divided out by income quintiles.

Because it is exactly this kind of thing that sank the Posen Plan, the farther you went down the income ladder the more the result looked like a riskier version of traditional Social Security: annuitized benefits initially exposed to short term market performance in the years immediately before retirement.

Andrew G. Biggs said...

100% dependency on Social Security benefits is obviously a difficult measure, since even a dollar of outside income means you're no longer wholly dependent but obviously has little effect on your overall lifestyle.

That said, if we lower the bar a bit -- to 90% depedency -- there's still a large effect when you adjust the numbers for some reasonable assumptions. The official percentage who rely on Social Security for 90% of their income is 30%; adjusted for other factors (but not for non-cash benefits, which strangely is the only issue mentioned in the comments even though its overall effect is tiny), that number drops to less than 14%.

As Bruce notes, these numbers themselves don't prove anything, and I'd fully grant that. That said, many people feel that high levels of dependency on Social Security DO prove something; for those folks, it's important that we have the most accurate numbers possible.

Happy Easter to all, Andrew

Bruce Webb said...

"The official percentage who rely on Social Security for 90% of their income is 30%"

Okay. The maximum Social Security benefit for a couple in 2007 was $38,000 meaning that every household earning more than $42,200 annually fall outside this definition. This source shows that median income for households over 65 was $27,800 in 2006.

So while it is possible that large proportions of elderly households could fall within that 90%/30% simple observation of how the world works in relation to pensions that percentage should rise sharply as total income sinks below median levels.

Which has always been the challenge for privatizers, how do you get to the 50% plus one vote level to allow a democratic majority to support your plan? The Economic Right starts from the general position that within limits of law it is not only just but moral to seek to maximize your overall economic return. Well that works fine if your mental world starts from the position of the individual actor or contrawise if you work from a position of totality, it breaks down somewhat when you start from a position of aggregates within the totality.

For example Free Traders like to start (and stop) with a totality position. Ricardian Advantage probably does work when examined from a national perspective, but how does it end up after being diced and sliced? Economic theory might well support the introduction of private retirement accounts, and HSAs and ESAs taken as a totality. But we know to a certainty who benefits most from them, which is wealthy people (it is astonishing how much of a high end life style could be expensed as 'health' or 'education' if you put your mind to it: spa trips, golf dues, sending your kid to Europe, that top end computer.) How does it work for everyone else?

At some point any of these plans has to face the daily challenge of any market transaction: 'What is in it for me?' If that is a fair question when dickering for an executive compensation package (and few on the Economic Right could deny that) why isn't it a fair question when posed by wage workers?

Or to put in a little more elevated terms. What is the theoretical defense against a pragmatic greatest good for greatest number position in the context of a democratic government? Or to lower the discourse. Why shouldn't democratic majorities be able to tax and spend if it increases overall economic or social utility to a clear majority? Given an economic system that has clearly internalized the position of the fictional Gordon Gekko, if 'Greed is good' works for Gordy, why not for a 60% majority?

(Because between you and me, that 'skill premium' answer is breaking down. American CEOs are clearly not that much smarter or more skilled than the average academic PhD. I know Think Tank life can be pretty good, but I suspect it doesn't come complete with a high seven digit income.)