By Mark J. Warshawsky

This post is the second in a series of four posts on Social Security reform written to complement “Reforming Social Security” in the spring 2022 issue of National Affairs. You can view part I here and a Social Security reform slide deck here.

It is entirely appropriate for the Social Security
Administration (SSA) to conduct research into the role that retirement benefits
from its program plays in the overall retirement income of the elderly and the
reduction of aged poverty. These statistics and analyses are essential to advise
on the optimal design of Social Security policy and the administration of the
program, and to support the public’s understanding of, and planning for, Social
Security and retirement. Indeed, researchers at SSA have been doing precisely
this data collection and analysis for several decades through regular
publications on income of the aged, and the results have been widely cited. They
have used data collected from the Current Population Survey (CPS) fielded by
the Census Bureau. This data, from a reasonably sized sample and a stable
instrument, was initially considered reliable for this purpose. Over time,
however, particularly as the main form of retirement income from employers
changed from defined benefit pension plans to 401(k) plans and IRAs, some analysts
discovered that survey respondents were confused about how to classify
distributions from retirement accounts and that there was a significant
underreporting of private retirement income. SSA also eventually came to this
view and stopped the publication of its series in 2014 and began to explore
alternative sources of data. In 2021, after much technical and administrative
effort, researchers at SSA published new statistics based on more comprehensive
and extensive data sources for this key analytical task. In particular, they
added administrative data from SSA and the IRS from Form 1099-Rs to the base
CPS. The 2015 results revealed a fundamentally different and less important
role for Social Security and a larger place for pensions and personal
retirement accounts than previously presented.

Figure 1 shows the percentage distribution of aggregate
income among individuals aged 65 and older, by source of income. On the right
side, the distribution shown is based on the old data source, CPS only. It
tells the story that Social Security is the major source of income of the aged,
at 35 percent, with work earnings following, at 31 percent, and pensions and
retirement accounts, at only 22 percent of total retiree income. By contrast,
the new data sources flip the narrative so that pensions and retirement
accounts now account for the largest share, at 36 percent of total retiree
income, Social Security 30 percent, and earnings 25 percent.

Figure 2 shifts the focus from the aggregate to the elderly
individual, and shows the percentages of people with family income from various
sources including Social Security, asset income, retirement accounts, earnings,
other public benefits, and other. Comparing the results across the two data
sources, the only significant difference is for pensions and retirement
accounts — based on the CPS only, less than half of elderly individuals have
income from that source, but with administrative data added, fully 70 percent
of individuals have income from pensions and retirement accounts.

Figure 3 shows what is perhaps the most widely reported
statistic on this subject – the percentage of elderly individuals for whom
Social Security represents a selected proportion of family income. Based on CPS
data only, more than half of the elderly population get more than half of their
income from Social Security, and a quarter get more than 90 percent from Social
Security. Based on enhanced data sources, less than 40 percent get half of
their income from Social Security and just more than 10 percent get 90 percent.
Finally, not shown, according to the old data, 9 percent of the elderly were in
poverty, but according to the new data, measured overall income levels increase
and only 7 percent were impoverished.

SSA must continue on this path to improve the measurement of retirement income of the aged, in cooperation with the IRS and the Census Bureau, and update and regularly publish its new data series. The use of the old data source, taken up by the AARP, is not credible and must be disregarded by responsible media and analysts.

The post Social Security reform, part II: Private retirement accounts and pensions appeared first on American Enterprise Institute – AEI.