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Retirement incomes are rising. The president ought to rethink his pledge not to touch Social Security.
For years, headlines have blared that Americans are facing a “retirement crisis.” During last year’s presidential campaign, the candidates promised not to cut Social Security benefits ( Donald Trump ) and even to increase them ( Hillary Clinton ). In January, the 1980s pioneers of 401(k) accounts told this newspaper that they have turned against their creation, which “wasn’t designed to be a primary retirement tool.”
This would all be alarming if it weren’t so misleading. The truth is that private plans such as 401(k)s have allowed more people than ever to save for retirement. When traditional pensions peaked in the mid-1970s, about 45% of American workers had an employer-sponsored retirement plan. In today’s world of 401(k)s, 61% of workers do, according to a government analysis of Internal Revenue Service records.
Contributions to private plans have, according to my own analysis of data from the Labor Department, risen from an average 5.8% of wages in 1975 to 8% in 2014. Also according to my analysis of data from the National Income and Product Accounts, payments out of private retirement accounts, after adjusting for inflation, have nearly tripled since 1984.
This has benefited rich and poor Americans alike, as two Census Bureau economists, C. Adam Bee and Joshua Mitchell, demonstrated in research published late last year. They used data from the IRS and Social Security Administration to measure the incomes of retiree households. The study focused on female retirees, but because it used household incomes it effectively captured all retirees save for unmarried men.
The data showed that in 1984 only 23% of households received benefits from private retirement plans. By 2007 that had risen to 45%. Moreover, during the same period the benefits that the median household received from private plans rose by 141% above inflation, versus only 25% for Social Security benefits. In other words, despite the “retirement crisis” meme, retirees have become less dependent on Social Security, not more.
This is true across the income spectrum, as Messrs. Bee and Mitchell show. They calculate that between 1989 and 2007, the median retiree household’s total income increased by 58% above inflation. For poorer households at the 25th percentile, total income rose by 50%. For households at the 75th percentile, it rose by 52%.
Messrs. Bee and Mitchell also calculate retirees’ incomes as a percentage of their preretirement incomes. Most financial advisers say 70% is sufficient to maintain a stable standard of living. The data show that in 2008 retiring households typically had incomes equal to 95% of their incomes just prior to retirement. The figures didn’t differ significantly when households were broken down by education level or marital status. This helps explain why three-quarters of retirees surveyed by Gallup last year said they have enough money to live comfortably.
In light of rising retirement incomes, why do so many people insist on a coming “retirement crisis”? One reason is that the most prominent government data sets available to researchers dramatically understate retirement incomes. The Census Bureau’s American Community Survey and Current Population Survey count retirement benefits as “income” only if they are paid out regularly, whereas most retirees simply draw down their IRAs and 401(k)s as needed. One Census Bureau study from late last year found that the ACS captures only about 55% of total retirement benefits, and I have found similar results for the CPS. Data from the IRS are more reliable since they are based on the full amounts retirees report in their tax returns.
Given rising retirement incomes, the Trump administration should reconsider its pledge not to cut Social Security benefits. The program is 25% underfunded over the long term, the Congressional Budget Office projects. Yes, Social Security should be protected for the poor, even expanded to dramatically reduce the number of retirees in poverty. Policy makers should boost 401(k) participation by mandating automatic enrollment for middle and high-income employees and allowing small businesses to form multiemployer retirement plans. But the data prove that providing adequate retirement incomes does not require Scandinavian-level tax rates or multi-trillion dollar unfunded entitlement liabilities.
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