Academic journal article Social Security Bulletin

Shifting Income Sources of the Aged

Academic journal article Social Security Bulletin

Shifting Income Sources of the Aged

Article excerpt

Traditional defined benefit pensions, once a major source of retirement income, are increasingly giving way to tax-qualified defined contribution (DC) plans and individual retirement accounts (IRAs). This trend is likely to continue among future retirees who have worked in the private sector. This article discusses the implications of those trends for the measurement of retirement income. We conclude that Census Bureau's Current Population Survey (CPS), one of the primary sources of income data, greatly underreports distributions from DC plans and IRAs, posing an increasing problem for measuring retirement income in the future. The CPS and other data sources need to revise their measures of retirement income to account for periodic (irregular) distributions from DC plans and IRAs.

Introduction

In the United States, retirement incomes are supported largely by three pillars: Social Security benefits, employer-provided pensions, and personal savings (including nonhousing wealth and home equity).1 Some individuals continue working in retirement to supplement their income, but most older Americans discontinue full-time work. A relatively small proportion of retirees also receive income from welfare programs, such as Supplemental Security Income. This article discusses the prevalence of personal retirement savings plans in 2009, the increase in personal retirement account assets among the older population in the past two decades, and the implications of these trends for the accurate measurement of the income of the aged in the Census Bureau's Current Population Survey (CPS).

Since the early 1960s, the Social Security Administration (SSA) has published information on the income of the aged. Early reports were based on SSA surveys conducted in 1963, 1968, and 1972; since 1976, reports have been based on the CPS Annual Social and Economic Supplement. The share of aged people's income attributable to pensions rapidly increased in the 1960s and 1970s, peaking at 20 percent in 1992 and again in 2004. After 2004, the pension share of income gradually decreased to 18 percent in 2009 and 2010 (Federal Interagency Forum on Aging Related Statistics 2012, Table 9a; SSA 2012).

Pension income's decreasing share of total income for the aged partly reflects the traditional defined benefit (DB) plan's decreasing share of total retirement assets. Over half of the $17.8 trillion in total retirement assets at the end of the fourth quarter of 2011 were held in individual retirement accounts (IRAs) and defined contribution (DC) retirement plans ($4.9 trillion and $4.5 trillion, respectively) (Investment Company Institute 2012; Federal Retirement ThriftInvestment Board 2012). Based on these data, the share of retirement assets held in traditional DB plans and annuities decreased from 59 percent in 1992 to 47 percent in 2011. The decreasing proportion of assets in traditional pensions and the increasing share of total retirement assets in IRAs and DC retirement plans could partly account for the decreasing share of pension income in the income of the aged because the CPS appears to undercount distributions from DC plans.

Income has historically been underreported in household surveys, and several studies have concluded that pension income is underreported in the CPS (Bosworth, Burtless, and Anders 2007; Roemer 2000; Schieber 1995). Woods (1996) observes that the Census Bureau did not consider IRA distributions to be income in the 1990 CPS, and Czajka and Denmead (2011) conclude that the CPS does not clearly ask about distributions from retirement accounts such as IRAs and DC plans.

The CPS measures IRA distributions as money income if they occur "regularly," like annuity payments. However, because most IRA distributions are irregular, they are not measured as income in the CPS. In addition, very few DC plan participants take their retirement distributions as annuities (Brown and others 2008). Excluding periodic (irregular) distributions misses much of the money distributed from IRAs and DC plans that supports retirement consumption. …

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