Friday, February 10, 2017

New research finds rising retirement incomes, high replacement rates for new retirees

Over at Forbes, I write up some new research out of the Census Bureau which uses SSA and IRS administrative data to get a more accurate view of retirees’ incomes. Compared to household surveys, which miss much of the income that retirees draw out of 401(k) and IRA plans, the SSA and IRS data show much higher incomes for recent retirees, a much faster growth of incomes over time, and replacement rates – that is, retirement incomes as a percentage of pre-retirement incomes – for typical households that approach 100%.

You can check it out here.



JoeTheEconomist said...

How do they handle the people who don't make enough to file taxes? I looked at some aggregate IRS data, and it seemed like there was a significant chuck of people who collected benefits missing and the total amount reported to the IRS was well below what was distributed.

Andrew G. Biggs said...

I think you're issued a W-9 form even if you don't have to file a return.

WilliamLarsen said...

A W-9 form is a request for TIN. It is a withholding form. It has nothing to do with reporting income.

If you do not make enough to pay taxes, then the SS income is not reported. In many cases people who have large assets that pay no dividends and sell no assets or Roth IRA may not get reported. I know several millionairs that have only Roths IRA's and consumed their non qualified accounts thus reducing their reportable income to that of their SS-OASI. Not sure if the SSA would show these type of individuals relying solely on SS-OASI since roth's have no requirement to provide balances and withdrawls to the IRS.

Andrew G. Biggs said...

Checking back on the paper itself, it seems they use form W-2P and after that 1099-R. My mistake.

WilliamLarsen said...

”Retirees are “increasingly dependent on Social Security benefits,” says U.S. News and World Report. “Social Security made up 38 percent of the total income of people age 65 and older in 2009—up from 30 percent in 1962.”

In 1962 the payroll tax was half what it is today. This clearly created the ability for far more workers to save and invest. As the FICA tax went up, it disenfranchised many from being able to save.

”In the CPS, money is counted as income only if it’s received on a regular basis – say, every week or every month. If you receive money only irregularly, it’s not counted as income.”

This has been common since day one. Dividends, interest and capital gains are not included in income since they are not guaranteed. These were not included as income in the past. Is your data normal? If not you can draw no conclusion.

Also prior to 1981 there was no 401K and no IRA. However, people saved. This meant that it was after tax and the only income was that derived from capital gains which you only reported 20% of the gain and then paid ordinary income tax on it. Far lower than today. Have you included the pretax portion and the 80% of the gain prior 20 1980 as income so that you are looking at cash flow and not just income?

JoeTheEconomist said...

Thanks for getting back to me. I am curious whether it is just one chart or did the entire study end the day before the peak value of the S&P. This chart looks like it coincides with S&P 1500.

Andrew G. Biggs said...

I'm sure they used the most recent data available; there's a lag with this kind of specialist data. Obviously the stock market helps, but the big factor was more people getting retirement plan benefits, not the same number of people getting higher benefits juicedby the stock market.

Arne said...

After reading more carefully and looking at the chart again, I am led to the following question:

Given that retirees get to choose how much they take from private plans and seeing the correlation between confidence (per my memory of history) and income (high at stock and housing bubbles), are retirees taking too much from their private retirement accounts?

It is also very possible that they systematically take too little, but it seems that the reaction to perceived better times may still be too strong.

Andrew G. Biggs said...

My guess is they're probably okay. A number of studies (summarized here: show how most households aren't running down their assets in retirement. Even in the bottom two quintiles financial assets hold steady and in the middle and top they tend to rise. There are a number of explanations, but the big one seems to be that people just don't spend as much in retirement as we think they will. As people slow down, they don't want the fancy vacations, fast cars and big houses as much as middle-aged people do.