So Far, So Good?

A recent study drawn from IRS tax filings finds that American workers aren’t experiencing a drop in income after retirement.

Specifically, this particular analysis, “Using Panel Tax Data to Examine the Transition to Retirement” – conducted by the Investment Company Institute’s Peter J. Brady & Steven Bass, and Jessica Holland & Kevin Pierce of the Internal Revenue Service – found that most individuals were able to maintain their inflation‐adjusted net work‐related income after claiming Social Security.

In looking at that tax data, the analysis transcends what many surveys on retirement savings and confidence fail to do – look beyond the retirement savings accumulations of what is often a mixed bag of age, income and gender circumstances and the application of a frequently simplistic meter (such as a replacement ratio) to ascertain retirement income adequacy.1 Rather, this analysis focuses simply on the net work‐related income: the combination of labor income, Social Security benefits and retirement income, reduced by total payroll taxes and a proportionate share of federal income tax. Simplistically, it considers not how much is needed for retirement, but on how much individuals reported as net income on their taxes the year before they started drawing Social Security benefits, compared with the three years after they began that draw.

They found that, looking at working individuals age 55 to 61 in 1999 who did not receive Social Security benefits that year, three years after they started claiming Social Security (which could be viewed as a proxy of sorts for entering retirement) that median ratio of net work‐related income at that point compared to net work‐related income one year before claiming was 103% – which means, of course, that three years later, they are actually reporting (slightly) higher income levels than they were prior to retirement.

Replacement Weights?

Not that everyone fared as well, though perhaps not in the way you might expect. On average, net work‐related income increased substantially after claiming for individuals in the lowest quintile of 1999 income; was relatively flat for those in the middle of the income distribution; and fell for those in the highest income quintile. Three years after claiming, the median replacement rate was 122% for those in the lowest income quintile, 103% for individuals in the middle quintile, and 87% for those in the 95th to 99th percentile of income. Any of which stand in good stead to the 70%, 80%, or even higher “replacement rates” often touted as retirement savings goals.

So, how is one to reconcile this comforting finding with the headlines that so consistently warn of the looming retirement funding apocalypse?

The report is admittedly evaluating a somewhat selective sampling: those who claimed Social Security retirement benefits from 2000 to 2007 (having not previously claimed Social Security disability benefits) and who were alive three years after claiming. That year before claiming might (or might not) be representative of one’s pre-retirement lifestyle, for example. Ditto the applicability of the 1999 starting year for the analysis.

It’s worth noting that, directly or through a spouse, more than half (61%) of the individuals tracked (still) had income from a job three years after beginning to claim Social Security benefits, while nearly three-quarters (72%) had income from pensions, annuities and IRAs. Among those who worked three years after claiming, the median replacement rate was 137% for individuals in the lowest income quintile, compared with 112% overall. Among those who did not work three years after claiming, the median replacement rate was 103% for individuals in the lowest income quintile, compared with 95% overall.

Working ‘Out’?

The ability to work post-retirement is often cited as a factor, if not an expectation, in many pre-retirees’ retirement planning – despite the reality that numerous surveys suggest it’s not an option upon which to be safely relied. Consider too that among those who were no longer working, Social Security benefits were 65% of total income or more for one in four individuals, and were the only source of income for 1 in 10 – including 25% of individuals in the lowest quintile of 1999 income who no longer worked.

Indeed, the researchers found that, all else being equal, individuals who were lower-income in 1999, those who continued to work three years after claiming, and those who claimed Social Security benefits when age 62 or younger, all had higher predicted replacement rates. Said another way, those groups had lower income thresholds to replace.

Those cautionary notes notwithstanding, it’s hard not to draw comfort from the findings – and there’s little doubt that retirement savings made a difference; nearly all (over 90%) of those with retirement income in the first year after claiming also had retirement income in each of the next two years – and, in the five‐year period from one year before claiming to three years after claiming, 81% of individuals had retirement income in at least one year. In a presentation at the recent EBRI Policy Forum, Brady noted that the Survey of Consumer Finance (SCF) showed that, in 2013 among households with head aged 55 to 64, nearly two-thirds (62%) of those making $22,000 to $44,000 a year had some form of retirement plan assets (DB, DC or IRA), as did 83% of those making $44,000 to $71,000, and more than 94% of those making more than that.

Still, as comforting as the findings are for those individuals three years into retirement – it’s worth remembering that they tell us how this group of individuals are doing just three years into retirement. For now, at least, it’s good news, backed up by actual tax filings, not individual self-assessments of retirement readiness.

In sum: So far, so good.


  1. A notable exception to that bevy of self-assessment surveys is that put forth by the nonpartisan Employee Benefit Research Institute, whose retirement readiness projections consider not just pre-retirement income levels, but also post-retirement income needs, as well as a foundation based on administrative data of actual retirement savings.

Add Your Comments


  1. Posted May 23, 2017 at 11:00 am | Permalink

    I’m not sure how much comfort one should draw from this study, and its questionable conclusions could potentially harm working Americans if used to justify a reduction in retirement savings tax incentives. The study, at least as summarized in this article, ignores sustainability of income during retirement, which is the central element in America’s retirement savings crisis.

    According to a 2016 study by the Economic Policy Institute (EPI), the average retirement savings for families in the pre-retirement age bracket of 56 to 61 is $163,577. That’s enough to provide about $12,600 of annual retirement income, assuming a 6% return and 25 remaining years. However, this average number belies the real problem, as it is distorted by those at the top with very large retirement accounts. The median savings for is age group, according to EPI, is $17,000. This means that millions of Americans are going to run out of retirement savings pretty quickly.

    A central assumption of the ICI/IRS report is that claiming Social Security benefits is a good proxy for retirement. Could it be that many workers claim benefits as soon as they can to help them get by during their later working years? That could explain the study’s conclusion that household income is sustained for the three years following “retirement”. The IRS has all the data. Why was three years selected? Was that the only time period that supported their preset conclusion?

    Social Security alone does not provide sufficient retirement income for most people. The EPI numbers above show that millions of people have little or no retirement savings. Millions of people must continue to work during “retirement”. What happens when they cannot work any longer?

    There is a very real retirement saving crisis in America. As a group, NAPA members, and the greater ARA organization, are working daily to improve this situation. It’s not helpful to try to construct an argument that everything is fine. It’s not. And to use this flawed study to justify any cutback in retirement savings incentives would be shameful.

  2. Nevin E. Adams, JD
    Posted May 23, 2017 at 11:45 am | Permalink


    My understanding is that the data was what was available, and that the intent is to keep working with more data, as it becomes available. I share your concerns about the tendency to misapply findings to justify bad policy, but I didn’t see that here. Rather, I think there it contains a lot of support for just how critical private retirement savings are in terms of providing an essential component of retirement security. In any event, appreciate very much your thoughtful comments.

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