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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