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.
Sunday, August 31, 2008
Re Krugman on “How Important is Social Security?”
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