Skip to comments.Experts: ‘Retirement Crisis’ Concerns Might Be Overblown
Posted on 03/07/2014 7:00:22 AM PST by SeekAndFind
WASHINGTON Experts have cautioned against concerns over a retirement crisis, saying the most commonly cited measure of retirement income ignores a large portion of the money retirees receive.
Recently, many pundits and policymakers have expressed much concern  about the U.S. retirement system. They argue that the United States is facing a crisis due to the shift over the past three decades from defined-benefit pensions to defined-contribution savings plans. They also worry Americans do not seem to save enough when they are working and in retirement their meager pension income will force them to rely on Social Security.
In response, several lawmakers have proposed changes to Social Security and the U.S. pension system.
Sens. Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio) have proposed increasing Social Security benefits, despite the program facing a deficit  over the next 10 years.
Sen. Tom Harkin (D-Iowa), who helped legitimize the term retirement crisis after releasing a report  on the issue in 2012, unveiled legislation last month that would offer retirement plans to Americans who are without access to workplace retirement plans or are self-employed. The Iowa Democrat has also introduced a bill that would increase Social Security benefits.
But according to former Chairman of the Social Security Advisory Board Sylvester Schieber, the narrative advanced by those who worry about a retirement crisis in the U.S. is partly based on bad data.
Schieber and his colleague Billie Jean Miller found that the data ignores retirees growing private retirement savings and income and this, in turn, distorts private pensions role and makes assessments of the financial health of retirees inaccurate.
In their paper , Schieber and Miller argue that information on income from retirement plans provided by the Current Population Survey (CPS), a study by the Census Bureau, and the Social Security Administration is incomplete, which suggests that the retirement crisis may not be as bad as some might think.
The CPS is clearly missing a great deal of retirement income, Schieber said recently at the American Enterprise Institute. There is very substantial amounts of income here that are not being captured, and its pension and IRA income.
Schieber said the perception of a retirement crisis is largely based on the CPS, which forms the basis of the Social Security Administrations Income of the Aged publication series.
The CPS measures the sources and amounts of income received by American households, including income from retirement plans. The Census Bureaus income includes only pension payments made on a regular basis like a traditional defined benefit pension or a monthly annuity payment. Other irregular payments, such as withdrawal from individual retirement accounts (IRAs) and payments from defined-benefit pensions, are not counted as income.
The policy prescriptions and analyses that ignore them are distorting the perceived economic welfare and situation that the [retired] portion of the population is currently facing, Schieber said.
To arrive to their conclusion, Schieber and Miller looked at Internal Revenue Service federal tax data and compared it with CPS data.
For 2008, the CPS captured only $5.6 billion in individual IRA income. Retirees themselves reported $111 billion in IRA income to the Internal Revenue Service. The CPS reported that in 2008, households receiving Social Security benefits collected $222 billion in pensions or annuity income. But federal tax filings for 2008 show that these same households received $457 billion of pension or annuity income.
The system that we are not counting income from is by far the overwhelming and largest portion of the retirement system today, Schieber said. And if we want to know how people are doing in economic terms during their retirement, it seems to me we must begin to focus on trying to count that.
Schieber stressed that he is not contending that retirees at the bottom of the income distribution are getting a lot of money out these plans, but rather that the tax filings are a reality check on the CPS numbers.
Schieber noted that in its statistics, the CPS does not account for at least 95 percent of IRA distributions and at least half of pension and annuity income.
Measurement is everything here, said John Sabelhaus, chief of the Federal Reserves Microeconomic Surveys Section.
Sabelhaus said the Survey of Consumer Finances (SCF) might be better suited to capture retiree income and account flows. The SCF captures data on the income and wealth of U.S. families, including IRAs and 401(k)s.
Using the SCF reveals that resources available to retirees are more substantial than the CPS suggests. The increases for low-income individuals, however, are substantially smaller than those at the top of the income distribution.
He said the shift from defined-benefit plans to defined-contribution plans will only increase the need to measure retirement income and financial status in a different way.
Sabelhaus also noted that the demographic profile of retirees might be evolving as well. He said the increased participation of people age 65 and older in the workforce not only changes the definition of a retiree, it also increases their income and may have an impact on the solvency of Social Security.
President Obama plans to ask Congress to reduce tax benefits for high-earning 401(k) investors as part of his 2015 budget. The president wants to limit the value of all tax deductions, defined contribution exclusions and IRA deductions to 28 percent of income.
Article printed from PJ Media: http://pjmedia.com
URL to article: http://pjmedia.com/blog/experts-retirement-crisis-concerns-might-be-overblown/
URLs in this post:
 much concern: http://pjmedia.com/blog/lawmakers-hear-proposals-to-improve-retirement-security/
 facing a deficit: http://www.cbo.gov/sites/default/files/cbofiles/attachments/12-20-13-DeficitReduction.pdf
 report: http://www.harkin.senate.gov/documents/pdf/5011b69191eb4.pdf
 their paper: http://www.iijournals.com/doi/full/10.3905/jor.2014.1.3.014#sthash.seJeIE1S.6S3fkNwq.dpbs
OK...Got it. Now somebody explain to me why this is my or any other American's problem?
This will be totally ignored because:
Low income and minorities don’t save as much and everything needs to be equal;
And the gov’t needs retirement accounts that must invest in U.S. Treasuries as the Fed tapers QE
Because the government will MAKE it your problem.
I dont understand this. CPS did a study on income in retirement but left out people’s 401K distributions? That’s like studying how many calories people eat in a day and leaving out dinner and snacks.
Probably because most don’t save a significant amount in 401k to matter.
“Probably because most dont save a significant amount in 401k to matter.”
I thought the point of the story was that they did but CPS ignored it. That’s was why their income was greatly underestimated.
“Schieber noted that in its statistics, the CPS does not account for at least 95 percent of IRA distributions and at least half of pension and annuity income.”
save for later
I think the real issue is that a very small percentage of the population have substantial IRA accounts. The ones who do, raise the average by a very large amount, but it might be less than 25% of the retired population. The other 75% don't have much.
I am not going to fall into the Obama trap of calling these the "lucky few". Luck has very little to do with having a meaningful IRA. Those who don't have one, think it is all luck and that the government has a duty to even it all out. But those who do have significant savings know that it comes from a lifetime of paying attention, listening to advice about retirement, and actually choosing to defer consumption to a later time.
And, the socialists who look at IRAs and say the top few percent should be taxed more never seem to realize that for most, a larger IRA represents the result of 40 years of doing without new cars, vacations, and lots of things their neighbors considered "necessities".
You said it. My wife and I forgo many luxuries and little pleasures, trying to save for retirement. We should not be punished later, because we're making sacrifices now.
A socialist has never seen a substantial bank account he didn't want to take away and spread around for the "common good".
RE: I think the real issue is that a very small percentage of the population have substantial IRA accounts.
OK, here’s a question -— what does “substantial” mean when it comes to IRA?
How much must one have in one’s IRA for it to be considered “substantial”?
I'll take a stab at it. $100K is low end substantial and $3.2M is high end substantial. The administration is proposing doing away with RMD for accounts under $100K and capping accounts at $3.2M.
They also have a proposal to require RMD for Roth accounts..
Which brings to mind the quote attributed to Leon Trotsky, "You may not be interested in war, but war is interested in you".
That's the point, isn't it?
Until the money is used up.
Then social upheaval and dictatorship.
This is interesting. I’ve heard from several liberal democrat sources that the reason so many people are retiring is because the economy is going so well that the baby boomers can retire with their new found wealth.
Now it’s a crisis.
Democrats, is there anything they can’t Fluke up?
I would go a little higher and say that about $250k is the beginning of substantial. There is no higher limit on substantial, but due to the limits of 401(k) contributions an individual with $3+ M is either very highly paid, or a very good portfolio manager.
While there is no towering giant in the field of portfolio management in distribution, like there are in the portfolio management in accumulation field, the very best advice I have seen is that ~5% of the current value of a portfolio can be withdrawn every year without too great a risk of depletion. I am hoping to live with 4% annual withdrawals, which would be much more safe. But then I am a conservative and that is what we do. But, the portfolio must be almost entirely in stocks for that to work. The 40% fixed income - 60% stocks I see from most advisors does not allow that kind of withdrawal.
Even a meager income from a pension or SS allows variable portfolio withdrawals to be a very viable strategy in distribution.
I would assume that people with $1M+ balances start contributing early in their career and keep contributing. I would also assume that most people don’t really start contributing in earnest until their peak earning years which is in their late 40’s or early 50’s. That is the impression I get from friends and associates..
Very few people manage to do this, but the value of early contributions is very high, because of the compounding done over time. The math is such that even small contributions in a person’s 20’s, have greater weight than those in their 30’s and 40’s.
But, it is never too late to start.
Getting to $1M+ is actually simple. Start before 25 and keep contributing the maximum possible for the next 40 years. That is the simplicity, but it is not easy. There will always be a something to spend that money on, and “next year” will be soon enough to replace it. But “next year” never comes.
The other trick is to learn to manage your own money. A professional money manager will do no better than a self educated amateur, and you don’t have to pay yourself a commission every year.
We still have a lot of retirees who have the old traditional pensions from their former employers. Most of those pensions got phased out in favor of 401K plans about 30 years ago (except for public employees) so I think we’re soon going to start seeing people entering retirement with pretty much nothing other than SS. That’s when it’s going to get rough.
I think public pensions, state, local, city, teacher’s and federals will be swallowed into SS.
And they should.
I know a young woman who will be retiring at half pay at forty eight. Her husband defended her by saying that she worked since college. Who hasn’t? Then he said, well she works with K-3. So what?
Everyone works hard. Since when have teachers worked harder?
I am tired of having my pocket picked by public unions. To pay for someone’s forty year retirement.