Most American workers maintain or increase their spendable income after claiming Social Security, according to a new analysis of tax data by Investment Company Institute economists.

In their research, ICI economists Peter Brady, Steven Bass, Jessica Holland and Kevin Pierce analyzed tax data from 1999 to 2010, and found that the median worker replaced 103% of spendable income after claiming Social Security.

For most individuals, both Social Security benefits and retirement income — from employer-sponsored retirement plans, annuities or IRAs — provide substantial income.

Social Security, however, is relatively more important for lower-income individuals, retirement income matters more to higher-income individuals, and those in the middle receive a similar amount of income from both sources.

“The vast majority of workers we analyzed reported retirement resources other than Social Security,” Brady said in a statement announcing the study’s findings.

“Indeed, 89% of individuals held or drew income from employer plans, annuities and IRAs. These results suggest that a much higher share of retirees get income from these sources than reported in government surveys, and adds to the mounting evidence that household survey data understate retiree income.”

By looking at what tax filers, employers and financial institutions actually report to the IRS, Brady continued, “we are able to paint a more accurate picture.”

Of the 89% of individuals who had non-Social Security retirement resources, 81% received income, either directly or through a spouse, from employer plans, annuities or IRAs.

Another 8% had evidence of these resources — a Form 1099-R (reporting a rollover or other retirement account transaction that did not generate income), a Form 5498 (indicating IRA ownership), or both — but were not yet drawing on them, the study found. 

The ICI economists tracked working taxpayers aged 55 to 61 in 1999 who did not receive Social Security benefits that year using data from the IRS’ Statistics of Income Division.

The analysis primarily focused on spendable income from the combination of labor income, Social Security benefits and retirement income (distributions from employer plans, annuities and IRAs).

“Spendable income” offers a consistent measure of an individual’s ability to fund consumption, according to the economists.

Spendable income, they said, excludes income not available for consumption (e.g., tax payments and retirement contributions), but includes income that isn’t taxed (e.g., nontaxable Social Security benefits and distributions from Roth IRAs or Roth 401(k)s). 

The research compares taxpayers’ spendable income, as reported on their tax returns and on information returns provided to the IRS, three years after they claim Social Security with their spendable income the year before they claimed.

The 103% replacement rate for the median taxpayer indicates that spendable income rose for more than half of taxpayers. Median replacement rates three years after claiming were higher for individuals in the lowest income quintile (123%), and lower for top earners (95% for the top 1% of the income distribution).

— Check out Less Than Half of Americans Confident They’ll Reach Their Retirement Goals: AICPA on ThinkAdvisor.