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. 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.] 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.
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