American retirees may be better off financially than a key federal reports indicates.
The Census Bureau's Current Population Survey (CPS), one of the primary sources of income data, greatly underreports distributions from IRAs, 401(k)s and other defined contribution plans, a new reportin the Social Security Bulletin concludes.
The CPS measures IRA distributions as income if they occur “regularly” like annuity payments. But because most IRA distributions are irregular, they are not measured as income in the survey. In addition, very few 401(k) plan participants take their retirement distributions as annuities. “Excluding periodic distributions misses much of the money distributed from IRAs and defined contribution plans,” the article noted.
When traditional pension plans were more prevalent, most pension income was received as annuity payments and was counted as income by the CPS. But due to the shift from traditional pensions to tax-qualified retirement savings plans over the past 30 years, much retirement income has gradually disappeared from survey-based measures of retirement income. “As retirees increasingly rely on periodic distributions from DC plans and IRAs, the problem of underreporting pension income in the CPS could become increasingly serious,” the report said.
Tax records indicate that hundreds of billions of dollars are withdrawn from retirement savings plans each year — substantially greater than those recorded in household surveys such as the CPS. For example, the CPS recorded IRA withdrawals of only $6.4 billion in 2006 while the Federal Reserve Board's Survey of Consumer Finance recorded more than $95 billion in IRA withdrawals that same year.
As traditional pension plans continue to disappear, estimates of the income of the elderly will decline in the future. As a result, it may appear as if Social Security benefits constitute a larger share of income for the elderly than they actually do.
IRAs and 401(k) plans are the predominant retirement savings vehicles for workers in the 21st century. Both the prevalence and account balances have risen dramatically over the past 20 years. Between 1992 and 2007, the median value of retirement accounts in households headed by someone 65 or older more than doubled from $28,900 to $60,800. Households headed by individuals between the age of 55 and 64 had the largest median balance of $100,000 in 2009, up from just $43,400 fifteen years earlier. Yet one of the key government reports on income of the elderly fails to measure the importance of these sources of retirement income.
What does this all mean? Perhaps many retirees are better off financially than government reports indicate. And isn't it nice to read some potentially good news for change?