Many older Americans likely received 28 percent higher retirement income in 2013, or almost $71 billion more in aggregate, than previously assumed.
That’s according to a new analysis from the Employee Benefit Research Institute (EBRI). The researcher based that assessment on figures resulting from a new measure of retirement income. The U.S. Census Bureau tested that measure last year and is applying it this year.
The “updated” measurement is a set of questions that the Census Bureau asks as part of the Annual Social and Economic (ASEC) Supplement to its Current Population Survey (CPS). The ASEC is a widely cited source of data on income for those old enough to be considered retired (age 65 or older), according to EBRI.
The new questions inquire about ownership of individual retirement accounts (IRAs) and defined contribution (DC) plans such as 401(k)s and 403(b)s as well as whether the person has a traditional defined benefit (DB) pension plan or annuity-like income.
By comparison, the older measurement the bureau had used for roughly 20 years asked only one question. This “traditional” measurement, as it is called, focused on receipt of annuity-type payments such as those in DB pension plans. It made no reference to IRAs and DC plans.
Some retirement experts had grown concerned about the traditional measurement’s omission of questions about retirement income from IRAs and DC plans, which are now commonplace and often the only retirement plan a person has outside of Social Security. So, in 2014, the Census Bureau decided to test the traditional measure against the updated measure, which does inquire about IRAs and DC plans as well as pensions, to see what’s what.
EBRI’s study of the test results found that use of the updated questions revealed important trends in retirement income that had previously been missed in the ASEC data. One of the major changes is that older people have been bringing home more bacon in the form of retirement income than previously understood.
The source of that bacon is income from IRAs and DC plans, according to Craig Copeland, senior research associate at EBRI and author of the new EBRI analysis.
EBRI’s analysis of the Census Bureau’s test found that the new measure of income “identifies significantly more income (and a much larger percentage of income coming from IRAs and 401(k)-type plans).”
Those with IRAs, 401(k)-type plans and DB pension income from private- and public-sector employers are more likely to be in the upper-income quartiles, the study also found. That is because these individuals are far more likely to have these income sources. As a result, those who had access to, and took advantage of, these plans are the ones with higher amounts of this income in retirement, EBRI said.
Retirement experts had known or suspected that previous ASEC numbers, which used the traditional pension-only question, “were probably off,” Copeland told InsuranceNewsNet, noting the numbers did not match up with tax records.
The numbers also did not match up with the continuing growth that was occurring in IRA and DC plan assets. Retirement savings in those vehicles have grown from 50 percent of all retirement assets in 1985 to 83 percent by 2014, according to fourth quarter 2014 figures from the Investment Company Institute, as reported in the Insured Retirement Institute’s Fact Book 2015.
Now the EBRI study confirms the experts’ qualms. The test results show that retirement income was “being missed across all levels of income for Americans age 65 or older,” EBRI said.
In fact, EBRI found that the traditional measurement approach had under-reported IRA and 401(k)-type retirement income by more than 250 percent.
Retirement experts who follow income statistics have been expecting an outcome along those lines, Copeland noted. But for those who do not track or watch the data closely, the outcome will likely come as a surprise.
For retirement income advisors, the EBRI results suggest that older clients “may have more money to work with” than previously thought, Copeland said. These clients would be older people who are in the in the top two income quartiles, he said.
The findings have value at a trends level, too. Advisors and other retirement industry experts have drawn upon ASEC data for years. So retirement industry practitioners will value having access to updated retirement income data that correlates with the retirement income trends and products in the current retirement plan environment — i.e., not only pension and pension-like annuities but also IRAs and 401(k)s.
Despite the higher income estimates revealed by the new set of questions, Social Security remains “by far” the predominant source of income for ages 65 and up, EBRI cautioned, noting that more than 60 percent of the lowest two income quartiles receive more than 90 percent of their total income from Social Security.
Still, for retirement professionals who serve clients having higher incomes, the new data will be closely watched for changes that may impact customers, and for potential ways to use the numbers to help fine-tune retirement plans and retirement plan modeling.
The larger environment
On a macro level, the EBRI analysis provides fresh evidence of the powerful impact that IRA/DC plan growth is having on the retirement income marketplace.
DC plans have supplanted DB plans in much of the private sector today, EBRI pointed out. In addition, as workers switch jobs or retire, it said, they often roll over their pension and 401(k)-type savings into IRAs, which at 27 percent in 2013, represent the largest single share of the $26.2 trillion U.S. retirement savings market.
InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].
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