Economics, Taxes and Spending, U.S. Economy

A retirement crisis, by definition

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There’s a widespread perception that Americans are inadequately prepared for retirement – they don’t save enough when they’re working, and in retirement their puny pension income forces them to rely on Social Security. In response, elected officials like Sen. Elizabeth Warren propose increasing social security benefits, despite the program facing multi-trillion dollar underfunding. But in today’s Wall Street Journal, Syl Schieber and I write that this perceived retirement crisis is at least partly based on bad data.

The most common reference for retirement income, the Social Security Administration’s Income of the Aged series, relies on Current Population Survey data that doesn’t count most IRA or 401(k) withdrawals as income. In the CPS, only regular payments from a pension count as income – think of a traditional defined benefit pension or a monthly annuity payment. Irregular or as-needed payments, such as drawing down your 401(k) or IRA when you need funds, aren’t counted as income.

For instance, in 2008:

  • The CPS reported $5.6 billion in individual IRA income, but retirees themselves reported $111 billion in IRA income to the IRS.
  • The CPS reports that households receiving Social Security benefits collected $222 billion in pensions or annuity income. But federal tax filings show that these same households received $457 billion of pension or annuity income.

In total, the CPS is effectively defining away upwards of 60% of IRA and 401(k) income. It’s not hard to see how this could create the perception of a retirement crisis. Moreover, as Americans increasingly rely on IRAs and 401(k)s these data errors will only grow more important.

There are a range of other issues in understanding how well prepared Americans are for retirement. But this one is pretty important.

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5 thoughts on “A retirement crisis, by definition

  1. A puzzle. I see other references that IRA/401k balances are insufficient to support retirements. Lots of wealthier folks are converting pretax retirement money to Roth IRAs. Is that scored as IRA income?

  2. Income taken out of 401K rollover IRA’s should go up as boomers hit age 70.5, when they are required to take Required Minimum Distributions. I retired at age 63.5, and so far, we have been able to get by without tapping the IRA. Most people in my income strata depend on a mix of Social Security, pensions (if available), and their 401K. At least in the company I worked for, the 401K was never touted as a stand alone solution for retirement.

  3. They also don’t count substantial bank savings many have accumulated to the point they can make regular monthly withdrawals from, continuing to deposit something like SS payment into an ira until age 70.5.

  4. While 401(k)s are an important and growing part of the retirement system, they are not the sole or even predominant source of income for today’s retirees. Suggesting that 401(k)s are the failed patch in the quilt of retirement security is misleading.

    The true picture shows that Americans depend on retirement income from a variety of resources. The Baby Boom is no exception. Rather than being “the 401(k) generation”—which implies they spent their full career in a 401(k) world—Boomers are a transitional generation who have experienced a mix of pension coverage during their working careers. Today’s 60- to 62-year-olds typically entered the workforce in the early 1970s, a decade before the introduction of 401(k) plans. For these individuals, for much of their careers, 401(k) plans represent a supplemental component of their retirement accumulations.

    To evaluate the 401(k) system fairly, consider what a full career with 401(k) plans might generate for future retirees. Joint ICI research with the Employee Benefit Research Institute found that more than 60 percent of today’s 401(k) participants in their late 30s to mid-40s, who will turn 65 between 2030 and 2039, will accumulate enough in their 401(k) accounts to replace more than half their salary. Other studies have come to similar conclusions.

    Retirement security is a career-long race that must be won paycheck-by-paycheck—and 401(k)s will help Americans achieve their retirement goals.

  5. Hi everyone
    I always wondered why do we have to have a required min dist on the 401 (k) plans. It seems like a real pain, and nasty tax trap.

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