More on Social Security, Private Pensions, and Retirement Preparedness

January 11th, 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

Print Friendly, PDF & Email

5 comments in reply to "More on Social Security, Private Pensions, and Retirement Preparedness"

  1. foosion says:

    I will again bemoan the idea of putting Social Security and Medicare “on the table” (euphemism for cutting). The public overwhelmingly supports these programs and doesn’t want any reductions in benefits. They will most likely vote based on these issues.

    I’m not sure which is worse. Medicare is a problem because healthcare costs are a problem, but cutting Medicare will increase healthcare costs, making the problem worse. Social Security is or will be vital to vast segments of the population. If Social Security has a funding problem, it’s because of rising income inequality such that the cap on Social Security taxes, designed to cover 90% of wages, covers a smaller portion. The tradeoff for cutting benefits by increasing the retirement age was increasing funding. The solution is go back to that deal and raise the cap back to cover 90%, not to further cut benefits.

    Cut these programs and the Republicans will campaign that Democrats cut vital programs. Anyone remember 2010?

    Putting these programs on the table is a terrible idea, both as a matter of policy and politics.

  2. Scot Johnson says:

    You are doing wonderful work in educating people about the importance of Social Security. Both this post and your previous post on SS were excellent! Keep up the great work and thanks for taking the time out of your schedule to maintain this blog.

  3. Th says:

    I am with foosion in that all SS and Medicare talk is about cuts. If lots of people were out there talking revenue increases for both, I may move off my position of “just say no.” Certainly we should wait for full implementation of Obamacare before any major changes are made to Medicare.

    But then I thought the best thing to do with the fiscal cliff was to say it was postponed in its entirety until unemployment is 6% and then we go off the cliff. There may have been one other person who agreed with me.

  4. PeonInChief says:

    I particularly liked Drum’s comment that Medicare covers 100% of elder health care costs. In what alternative universe? My husband has just retired and, while we have a decent pension and retiree health benefits, we will still pay several hundred dollars a month for our insurance. And co-pays etc. Elders who rely on Medicare alone have much larger expenses, and frequently file bankruptcy because of those costs.