As the post-war Baby Boom generation enters retirement amid concerns about the long-term financing of Social Security, it is critical for Congress, policymakers, and the general public to recognize the central role of Social Security as a source of retirement income. Social Security remains the only universal source of retirement income for the vast majority of Americans. And, for most of us, it is the most relevant source of retirement income after a lifetime of hard work.
Yet Social Security was never meant to be the sole or even primary source of retirement income. To address apparent shortfalls in retirement income, Congress has tried to address retirement income security with changes in the tax code to encourage the growth of private pensions such as traditional defined-benefit pension plans, 401(k) type defined-contribution savings plans, and Individual Retirement Accounts, among a slew of other savings vehicles. For 2007, the government expects to lose tax revenue to the tune of $109 billion to support retirement savings in these plans.
Policymakers have also made several changes to help the elderly seek additional earnings as a supplemental source of income after reaching retirement age, which can be as early as 62. In 1983, for instance, the so-called earnings test, which set limits for the earnings of Social Security beneficiaries (before their benefits were reduced) was liberalized. This reform allowed for withholding $1 in Social Security benefits for every $3 in earnings over the exempt amount after 1990, and gradually increased the delayed retirement credit from 3 percent to 8 percent annually for those at full retirement age between 1990 and 2008. In addition, the annual earnings test exempt amount for recipients who have attained the full retirement age was raised in 1996, reaching $30,000 in 2002. Most recently, in 2000 Congress eliminated the earnings test for recipients who have attained the full retirement age.
Yet a secure retirement remains an elusive goal for many families. A study by the Center for Retirement Research at Boston College found that 43 percent of individuals nearing retirement were “at risk,” or unable to maintain their current standard of living once they stop working. Of those in the bottom third of the income scale, 53 percent were at risk, an increase from 47 percent in 1983. Further, this increase in the at-risk population among low-income families was principally caused by the reduction in Social Security benefits, a change enacted in 1983, but which affects only people turning 62 or younger in 2000, suggesting that additional savings and more earnings were not enough to offset the cuts in the nation’s premier retirement program.
It is difficult, however, to make predictions about the total retirement income of all the Baby Boomers or their possible earnings potential, given questions about how to finance the Social Security System in the coming decades alongside the inherent volatility of private pensions based largely on stock market returns.
But another way to look at some of these trends is to consider the population that is already in retirement and their sources of retirement income. Based on publicly available data from the Social Security Administration, this report finds the following income trends among those who were 65 and older in any given year between 1980 and 2004:
- Retirement income declined after 2000. The typical annual, inflation-adjusted retirement income for those 65 years of age and older declined annually by 0.1 percent between 2000 and 2004, the last year for which complete data are available.
- Social Security remains the most important retirement income source. In 2004 Social Security benefits accounted for 38.6 percent of aggregate retirement income, a far larger share than any other income source.
- Low-income and moderate-income workers depend heavily on Social Security. Among those in the bottom 60 percent of the income distribution, Social Security accounted on average for at least two-thirds of their retirement income.
- More Social Security benefit payouts are flowing to the middle class. Since 1990, the share of retirement income coming from Social Security has grown for whites and middle-income earners but also for single women and single men.
- Income from pensions has increased. Today’s retirees get a larger share, 10.2 percent of their income, from private pensions than retirees did in past decades.
- People over 65 receive less and less income from their assets. In 1990, income from assets such as dividends, interest payments, trust disbursements, amounted to 24.5 percent of retirement income, but by 2004 this percentage had declined to 12.6 percent of income.
- Earnings have gained in importance as retirement income source. Earnings accounted for 17.7 percent of income of the population 65 and older in 1990, but by 2004 accounted for 26.3 percent of total income.
These trends in retirement income over the past few decades highlight a number of important developments that should give pause to policymakers as the Baby Boomer generation enters retirement. Broadly speaking, retirement incomes have not kept pace with inflation in recent years, while Social Security has gained in relative importance.
Yet these two top-line observations mask a mixed bag of conclusions about how those 65 years of age and older are coping with the financing of their retirements.
Understanding the larger complexities of retirees’ sources of income and earnings today may help policymakers make some key decisions about helping Baby Boomers and subsequent generations cope with retirement in the coming decades. As our analysis will show, Social Security’s benefits must be protected and strengthened because low-income workers and minorities rely especially on this source of retirement income. Efforts should also be made to allow workers to save more outside of the equity in their homes and Social Security income, which will require vastly improved 401(k) type retirement savings plans as well as strengthened traditional defined-benefit plans. Finally, opportunities for those who reach the age of retirement to work longer, if they so desire, should be enhanced.
As the Baby Boom generation turns 65 between 2011 and 2029, the time has come to vastly improve all forms of retirement savings so that the vast majority of workers can enjoy a decent standard of living in retirement as a reward for a lifetime of hard work.