Sunday, August 31, 2008

Re Krugman on “How Important is Social Security?”

Paul Krugman discusses the importance of Social Security to total retirement income. He cites SSA data and concludes that for the typical retiree, Social Security benefits make up around two-thirds of total retirement income. However, for reasons discussed here, those numbers tend to overstate the importance of Social Security benefits. (Short story: a) the SSA data Krugman cites effectively counts couples as individuals; since couples are less dependent on Social Security and singles more, this weighting makes the overall population appear more dependent; b ) the SSA data derives from a survey that doesn't do a good job of counting asset income, such as draw-downs from IRAs and 401ks. I'd have to double check, but I don't believe that IRA or 401k income would be counted at all in this data. As people rely more on these accounts, this undercounting will make it seem as if they are more dependent on Social Security even if they aren't.)

To give some context, I've pasted in a table from a paper co-written with Glenn Springstead of SSA that's forthcoming in the Social Security Bulletin. It's based on the SSA's MINT (Modeling Income in the Near Term) model, which is the state of the art in modeling retirement income. The table breaks down sources of retirement income for individuals age 64-66 in the year 2005.

Table 6: Composition of total retirement income for retired beneficiaries age 64-66 in 2005

  

  

Lifetime earnings quintile

  

All

Lowest

2nd

3rd

4th

Highest

Social Security

39%

47%

43%

41%

35%

29%

Earnings

20%

16%

22%

19%

20%

25%

DB pensions

10%

8%

9%

11%

11%

12%

Asset income

25%

19%

20%

25%

31%

31%

Co-resident income

5%

9%

6%

4%

3%

3%

SSI

0%

1%

0%

0%

0%

0%

Total

100%

100%

100%

100%

100%

100%

Source: Authors' calculations, MINT model.

       

% total

39%

47%

43%

41%

35%

29%

% non-earned income

49%

57%

55%

51%

44%

39%


 

I've added two rows below the table that show Social Security as a percentage of total retirement income, either including or excluding earnings (since as people age their earned income will decline). Overall, Social Security accounts for around 39 percent of total retirement income for this group, or around 49 percent of income excluding earnings. Social Security is obviously a very important source of retirement income, but still lower than the 65 percent total than Krugman argues for.

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