Here’s something I didn’t know. Claims that Americans don’t save enough for retirement are based on measures of retiree income that … don’t include most of their income.
Oy vey. How the heck does that work?
Big name insider Andrew Biggs and outsider Sylvester Schieber* have the reason.
The story is largely based upon data from the Current Population Survey … Data from the Current Population Survey, or CPS, form the basis of the Social Security Administration's Income of the Aged publication series—which is widely cited as showing that Americans' inadequate retirement incomes … But the CPS fails to count most of the income Americans … as well as significantly understating the percentage of current American workers who are saving for retirement.
The CPS measures the sources and amounts of income received by American households, including income from retirement plans. The Census Bureau's definition of income, however, includes only payments made on a regular, periodic basis. So monthly benefits paid from a defined benefit pension or an annuity are counted as income, while as-needed withdrawals from 401(k)s or IRAs are not.
Think about that: only regular, periodic, inflows and outflows get counted.
There are no windfalls that get socked away that get counted for retirement: no bequests, no big bonuses or commissions, no severance packages, not even lottery or gambling winnings.
And, all those big ticket purchases that seniors make with lump sums (because, after all, that’s the smart way to buy stuff): the cars, the condos, the vacations, the elective surgeries … don’t count either.
The scale of this nonsense is astounding:
For 2008, the CPS reported $5.6 billion in individual IRA income. Retirees themselves reported $111 billion in IRA income to the Internal Revenue Service.
Oops. We didn’t count 95% of that category.
The CPS suggests that in 2008 households receiving Social Security benefits collected $222 billion in pensions or annuity income. But federal tax filings for 2008 show that these same households received $457 billion of pension or annuity income.
Oops! We missed over half your income.
It gets worse:
Even that is not the whole story—because tax filings do not include distributions from Roth plans, since those distributions are not taxable.
Now that’s sneaky: let’s figure out a plan to help retirees lower their taxes, and then when they divert money in that direction, we won’t count it when declaring there’s a problem that didn’t exist before. Ummm … yeah … worked like a charm as near as I can figure.
Then there’s this:
Tax figures omit pension and IRA distributions to low-income retirees who do not file annual tax forms.
You mean that person I was talking to just yesterday, who has everything paid for, and on who on paper is considerably richer than me, and actually saves money from the income that’s so “meager” she doesn’t have to file taxes anymore … doesn’t get counted at all? But, she’s rich, right? So the government is going around saying we’re not going to count her on the positive ledger at all, but we will count her on the negative ledger, even though she’s clearly in the 1%? Wha wha what??
Well, maybe this is a new problem. Not so:
… The agency has known for nearly 20 years that CPS data ignored much of the retirement income paid out by pensions and IRAs, and that the underreporting of this income was a growing problem. The agency's own policy analysts have been increasingly forthright in pointing out the shortcomings of the CPS in measuring retirement income. … [emphasis added]
Nevertheless, Social Security Administration summary reports developed from CPS data continue to be published. They are widely cited as justification for expanding Social Security and shifting away from the 401(k) and IRA saving system that today produces more income for retirees than does Social Security. Based on this faulty data, activists propose enlarging Social Security, which itself is dramatically underfunded, currently operating in deficit, and facing depletion of its trust fund in fewer than 20 years.
Read the whole thing, entitled “Retirees Aren’t Heading for the Poor House” in the January 24 issue of The Wall Street Journal.
* Biggs was formerly principal deputy commissioner of the Social Security Administration. He’s the inside guy. Schieber is the former chairman of the Social Security Advisory Board. He’s the outside guy.