Only a small percentage of older Americans, seven percent, receive income from Social Security, a defined benefit pension, and a defined contribution account. Retirement income from these three sources is widely considered to be the ideal situation to ensure retirement security, particularly for the middle class. Retirees with these three sources of income are far less likely to face poverty and economic hardship.
A new report also finds that a large portion (40 percent) of older Americans rely only on Social Security income in retirement. Social Security alone is not considered sufficient for a secure retirement, and it was not intended to stand alone. Typically, benefits from Social Security replace approximately 40 percent of pre-retirement income. Most financial planners recommend at least a 70 percent income replacement rate for retirees, while others say this should be even higher given longer lifespans and rising health costs. In fact, the analysis indicates that if Social Security income had been ten percent greater in 2013, there would have been about 500,000 fewer older households in poverty.
These findings are contained in a new report from the National Institute on Retirement Security (NIRS), Examining the Nest Egg: The Sources of Retirement Income for Older Americans. The report is co-authored by Tyler Bond, NIRS manager of research, and Dr. Frank Porell, University of Massachusetts Boston professor emeritus.
Download the report here.
The analysis also finds that without income from Social Security in 2013, the number of poor older U.S. households would have increased by more than 200 percent to 11 million households. Absent income from defined benefit pensions, the number of poor older households would have increased by 19 percent to more than four million households in 2013. Defined contribution plans, however, are less powerful at keeping older households out of poverty than pensions and Social Security because fewer near-poor households have assets in 401(k)-style defined contribution accounts and income from those accounts provided a smaller portion of total income. Without income from defined contribution accounts, the estimated number of poor older households would have increased by five percent.
This report examines the sources of retirement income for older Americans to determine how many older Americans achieve the “three-legged stool” of retirement savings: Social Security; a DB pension plan; and individual savings, typically through a DC account. Additionally, this report considers how sources of retirement income vary by gender, race and education. The study also estimates how different sources of retirement income impact poverty status, hardship, and public assistance and Medicaid costs.
More specifically, the impact of retirement income on public assistance and Medicaid costs, Social Security again had the strongest impact. Without Social Security income in 2013, the number of older households receiving public assistance would have increased by nearly 45 percent, while the number of older persons receiving Medicaid would have increased by more than 40 percent. Without income from pensions, the number of older households receiving public assistance would have increased by almost 19 percent, and the number of older persons receiving Medicaid would have increased by more than 15 percent. The impact of defined contribution income receipt was smaller for both measures.
Without income from defined benefit pensions, the combined costs for public assistance and Medicaid benefits to older households would have increased by almost $13.5 billion in 2013. Without Social Security income, combined costs would have increased by nearly $34 billion in 2013.
“The findings of this research reveal that Social Security has a profound role to play in preventing elder poverty,” said Dan Doonan, NIRS executive director. “Our analysis indicates that if Social Security income had been just ten percent higher in 2013, there would have been about 500,000 fewer poor older households. Accordingly, protecting and expanding Social Security should be a top priority for policymakers interested in the financial of security of America’s middle class and to keep them from falling into poverty.”
“But Social Security alone is not enough to provide a secure retirement,” Doonan cautioned. “It is clear from the data that pensions serve an important function in keeping working families in the middle class in retirement, more so than DC accounts that disproportionately benefit higher income Americans. The most surefire way to achieve a secure retirement is to have income from all three sources. But this just isn’t the case for most older Americans today, and we are on a treacherous path for the future with dwindling pensions and proposals to cut to Social Security.”
The report’s key findings are as follows:
- Only a small percentage of older Americans, 6.8 percent, receive income from Social Security, a defined benefit pension, and a defined contribution plan.
- A plurality of older Americans, 40.2 percent, only receive income from Social Security in retirement.
- Roughly equal numbers of older Americans receive income from defined benefit pensions as from defined contribution plans. This is likely to change in the future as fewer private sector workers have access to defined benefit pensions now than in the past.
- Defined benefit pensions have a much greater poverty- reducing effect than defined contribution plans. This may be partly due to the fact that recipients of defined contribution income tend to have much higher net worth than the recipients of defined benefit income.
- Unmarried older men and unmarried older women receive retirement income from similar combinations of sources, but the older men consistently have higher incomes than the older women. Both unmarried men and women have lower retirement incomes than married older men and women.
- Race and educational attainment both have very strong roles to play in determining retirement outcomes. Whites have consistently higher retirement incomes than blacks or Hispanics, and those with a college degree have significantly higher retirement incomes than those with only a high school education. Race and educational attainment also intersect in meaningful ways.
- Expanding Social Security benefits would be a potent poverty-reducing tool for policymakers to implement to fight elder poverty.
The study data were drawn from the first wave of the re-engineered 2014 Survey of Income and Program Participation (SIPP) and the 2014 Social Security Administration (SSA) Supplement on Retirement, Pensions, and Related Content. It includes an analysis of all respondents to both the SIPP and SSA Supplement who were age 60 years or older, and who worked fewer than 30 hours per week or not at all. It also includes all households with a householder age 60 or older, where neither the householder nor the spouse/partner worked 30 or more hours per week or didn’t work at all.