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The Importance of 3 Sources of Retirement Income: Study

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(Related: 12 Best States for Retirement: 2020)

Four in 10 older Americans rely solely on Social Security income in retirement — something for which the program was not designed and in any case is not considered sufficient for a secure retirement, according to a National Institute on Retirement Security report, released Tuesday.

The report, written by Tyler Bond, NIRS manager of research, and Frank Porell, professor emeritus at the University of Massachusetts Boston, found that only 6.8% of Americans receive income from a combination of Social Security, a defined benefit pension and a defined contribution account.

Retirement income from these three sources, the report said, makes it far less likely that retirees will face poverty and economic hardship.

The report noted that Social Security benefits replace only about 40% of pre-retirement income, whereas most financial planners recommend at least a 70% income replacement rate for retirees, and others say this should be even higher given longer lifespans and rising health costs.

In fact, the NIRS analysis showed that if Social Security income had been 10% higher in 2013, some 500,000 fewer older households would have been in poverty.

“The findings of this research reveal that Social Security has a profound role to play in preventing elder poverty,” NIRS executive director Dan Doonan said in a statement. “Accordingly, protecting and expanding Social Security should be a top priority for policymakers interested in the financial of security of America’s middle class and to keep them from falling into poverty.”

Still, Doonan pointed out, Social Security alone cannot provide a secure retirement. “It is clear from the data that pensions serve an important function in keeping working families in the middle class in retirement, more so than DC accounts that disproportionately benefit higher income Americans.”

He said receiving income from all three sources was the best way to achieve retirement security. “But this just isn’t the case for most older Americans today, and we are on a treacherous path for the future with dwindling pensions and proposals to cut to Social Security.”

The NIRS study drew data from the first wave of the re-engineered 2014 Survey of Income and Program Participation and the 2014 Social Security Administration Supplement on Retirement, Pensions, and Related Content.

It includes an analysis of all respondents to both the SIPP and SSA Supplement who were 60 or older and who worked fewer than 30 hours per week or not at all. It also includes all households with a householder age 60 or older, where neither the householder nor the spouse or partner worked 30 or more hours per week or did not work at all.

‘Three-Legged Stool’

Bond and Porell researched the sources of retirement income to determine how many older Americans achieve the “three-legged stool” of Social Security, a DB pension plan and individual savings, typically through a DC account.

They also considered how sources of retirement income vary by gender, race and education, and estimated how different sources affect poverty status, hardship, and public assistance and Medicaid costs.

Their analysis found that without income from Social Security in 2013, the number of poor older U.S. households would have increased by more than 200% to 11 million households. And absent income from DB pensions that year, the number of poor older households would have increased by 19% to more than 4 million households.

DC plans, however, are less powerful at keeping older households out of poverty than pensions and Social Security because fewer near-poor households have assets in 401(k)-style defined contribution accounts, and income from those accounts provided a smaller portion of total income.

Without income from DC accounts, the estimated number of poor older households would have increased by 5%, according to the analysis.

The research showed that Social Security income has a powerful effect on public assistance and Medicaid costs. Without Social Security income in 2013, the number of older households receiving public assistance would have increased by nearly 45%, while the number of older persons receiving Medicaid would have increased by more than 40%.

Without income from pensions, the numbers receiving public assistance would have increased by almost 19% and those receiving Medicaid would have gone up by more than 15%. The effect of DC income receipt was smaller for both measures.

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