By James Kwak
Catherine Rampell wrote a post last week about how Americans expect to retire later and how more elderly Americans are working. Her last chart also showed that a growing proportion of nonretirees expect Social Security to be a major source of their income in retirement.
That shows that Americans are becoming more realistic. But still, just 33 percent?
Just how important is Social Security, anyway? Let’s look at some numbers. Around 2003, Barbara Butrica, Howard Iams, and Karen Smith analyzed the composition of household income for people at age 67. They projected that median-income early baby boomers, when they reached 67, would have mean per capita family income of $33,000 (Table 3), of which Social Security made up $13,000, or 40 percent. Does 40 percent qualify as a “major source” of income? I would say so. Imagine losing 40 percent of your income.
But Social Security is actually more important than that. Remember, these are 67-year-old people, and 49 percent of them are still working. Yet most people hope to stop working someday. If you subtract out earnings, imputed rental income (the non-cash benefit you get from living in a house you own), and co-resident income (earnings of younger family members who happen to live with you), you’re down to a total of $23,000, of which Social Security is now 57 percent.
Another way to look at Social Security is to compare it to the things that, in some people’s eyes, were supposed to make it unnecessary: 401(k) plans. In the projection, for early baby boomers (people retiring now), about half were expected to have defined benefit pensions and the other half were expected to have individual retirement accounts like 410(k)s and IRAs. The latter group are getting about $4,000 from those retirement accounts. That could go up; maybe people are withdrawing less while they are still working. It could also go down; maybe people are withdrawing money at an unsustainable rate. But in any case it isn’t much, and it’s not even close to what Social Security contributes. (Remember, the Social Security figure of $13,000 also doesn’t include people who have chosen to delay taking benefits until after age 67.)
In 2008, Andrew Biggs and Glenn Springstead did a similar analysis, with similar results. Social Security provided 41 percent of income for beneficiaries ages 64–66 (Table 5), but when you strip out earnings and co-resident income, that figure goes up to 53 percent.
Both of these analyses focus on people in their 60s. As people get older, it seems that they rely on Social Security even more—not only because they stop working, but probably because they exhaust their other assets, or because their other pensions are not indexed for inflation (unlike Social Security). According to Sylvia Allegretto, if you look at retirees in the middle of the income distribution in California, a full 70 percent of their income comes from Social Security, with only 16 percent coming from retirement funds.
There’s a lot of talk today, some of it coming from Simon and me, about how the federal government is in danger of running out of money. But at least the federal government has some pretty potent options, like raising taxes. But American families as a whole are also running out of money, and they don’t have a lot of options. That’s a major reason why now is not the time to dismantle our social insurance programs.