More on Social Security, Private Pensions, and Retirement Preparedness

Jan 11, 2013 at 9:48 pm

Recall this post on how the loss of defined benefit pensions underscores the need to protect our national public defined-benefit pension program: Social Security.

Fellow blogger Kevin Drum responds to the post with this interesting look at income trends of older relative to younger households showing the older cohort to be doing much better in terms of growth rates than the younger ones.  Though Kevin’s very sympathetic to the need to protect Social Security’s benefits for low-income recipients—he writes, “Any change to Social Security should have no impact on the poorest retirees”—these positive median income trends for 65+ households lead him to worry less than me about the decline in private DB pensions because of the favorable trend in the incomes of the elderly.

I think it’s more complicated than that.  First, one thing you see when you look at Kevin’s income data is much less cyclicality in the median income of older households.  That’s because they’re less dependent on earnings (though more so over time since they’re working longer) than younger households, and of course more dependent on…wait for it…Social Security.

The first figure below shows that for most elderly (65+) households, Social Security provides the majority of their income; unsurprisingly, the program’s income is most important for minority elderly households.  Absent Social Security benefits, 44% of elderly households would be poor versus 9% without those benefits (second figure).

So one thing you’re seeing when you look at the rising median incomes of older households relative to younger ones is, in fact, their dependence on Social Security income.  And one reason their incomes go up more than those of younger families is that initial benefits are indexed to average (not median) wages and then grow with inflation.  As we unfortunately know all too well, paychecks for most families that depend on work have been losing ground to inflation for a while now.

Probably the best way to get at this question of whether the elderly’s income growth is boosting their retirement preparedness such that we’d worry less about the loss of DB pensions is to look at…retirement preparedness.

For that, I turn to the high quality work of the Center for Retirement Research and their National Retirement Risk Index (NRRI).  This metric provides a comprehensive measure of the share of working-age households at risk of not being able to afford their pre-retirement living standards when they retire, accounting for income and assets (including homes), projected into the future.  The third figure below shows a gradual increase in the share at risk of falling more that 10% below an income stream in retirement that would allow them to retain their pre-retirement living standards, and a large jump in the NRRI from 2007-10 (the loss of housing wealth was a major factor, of course).

The punch line is that more than half of today’s working households “will not have enough retirement income to maintain their pre-retirement standard of living….”

So, while it’s good to see the median incomes of the elderly growing fairly steadily, there’s little in that fact that would lead you to worry less about a) their income in retirement, b) the decline in their private pensions, or c) the necessity of maintaining a strong and solvent Social Security program.

Re that last point, OTE’ers know (and many bemoan) that I agree with Kevin that it’s not realistic to keep Social Security and Medicare off the table in ongoing budget negotiations.  But only with the realization of how vital they are to so many households, and not just poor ones.  We must assiduously avoid fixing these social insurance programs by breaking them.

Sources: Top two figures, CBPP; third figure, Center for Retirement Research

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