Friday, January 24, 2014

Retirement income: How bad is it?

I have a piece co-authored with Syl Schieber in today’s Wall Street Journal looking at how we measure retiree’s incomes. Probably the most widely cited publication on the subject is SSA’s Income of the Aged series, which is based on data from the Current Population Survey.

The CPS is great for a lot of things, but counting pension income isn’t one of them. The CPS counts as income only regular payments, such as from a DB pension plan or an annuity, but doesn’t count irregular or as-needed withdrawals from 401(k) or IRA accounts. Obviously this will understate the income retirees draw from these plans – using tax data, we show that the CPS misses at least 60% of DC pension income. And, because retirees are increasingly participating in DC plans, the error will grow over time, showing trends in retirement income that may not actually exist.

I think the Journal piece may be gated, but the full text should be available on my AEI web page in a few days.


WilliamLarsen said...

Saving for retirement is a long term process. The objective when you reach retirement is to have enough capital to last. This means that in the first year of retirement you may consume 97% of all your income and with drawl 3% of capital in order to provide for your needs/wants. When you get to the last year of retirement your income from capital may only amount to 1% of your needs/wants and 99% from you capital.

Income in retirement is not a good measure of ones ability to meet needs/wants.

Income in retirement is not the goal, but capital is that can be converted to cover needs and wants.

In simple terms at any given time the retirement community is most likely getting 50% of their needs from income and 50% from capital conversion. So if a person let's say is 75 years old and has an income of $20K, then it is most likely they are converting another $20k in capital so that they have $40K to use to cover needs and wants.

JoeTheEconomist said...

Your article is not visible unless you have a subscription, but your comment "based on data from the Current Population Survey" says you will end up in the wrong conclusion.

Today's retirees are in a much better shape financially than generations following.

Andrew G. Biggs said...

Joe -- Unfortunately the article is gated, but I think it will eventually be up on my AEI web page. The short story is that the CPS misses around 2/3 of DC pension income, and so obviously undercounts incomes in retirement.

WilliamLarsen said...

JoeTheEconomist is correct today's beneficiaries are doing far better than future beneficiaries (retirees) will.

My father paid a life time payroll tax on all income of about 4.5% while my children are paying 15.3%. We all know that if you have less take home pay, you have less to save.

Therefore, those born prior to 1940 have had far more taken home pay to save than today's workers' as a percentage of wages. This means they were better able to participate in the growing economy.

The recent reports on wealth gap proves that point. Those who had investments participated in the growth in companies while those who only had real estate fared less well.

Social Security and Medicare disenfranchise workers from participating in the economy by taxing them on the first dollar earned at a much higher rate than any previous generation.

To add insult to the wound, those born prior to 1940 are reaping multiple times what their payroll taxes would have yielded while today's workers will get pennies on the dollar.

Single Largest Ponzi Scheme there is!