Is the Current Retirement Income System ‘Inadequate?’ The Data Has an Answer

John Sullivan

Recent research from the Investment Company Institute (ICI) sought to answer two critical questions on which retirement policy is often based—how do the amount and compositions of spendable income for individuals change from middle to old age?

“There are constant proposals to overhaul Social Security,” said Peter Brady, ICI’s Senior Economic Adviser, Retirement and Investor Research. “We think such proposals should be based on accurate assessment of how the system is working.”

Brady, who conducted the research with fellow ICI economist Steven Bass, said many of the proposals are motivated by the belief that the current system provides inadequate resources, workers are unable to replace their earnings when they retire, and the voluntary component of the retirement system, that is, employer defined benefit and defined contribution plans, are failing, leaving retirees too reliant on Social Security.

“There are commonly held beliefs that the system isn’t doing too well,” he added. “We think that’s based on faulty research.”

They found that most retirees have spendable income, and the typical individual maintained more than 90% of their average income from age 55 to 59 through age 72. Notably, the ICI study relied on IRS tax data as opposed to Consumer Population Survey data, which has been most commonly used by the retirement research community and appears to result in significantly underreported income. 

The researchers ranked individuals by their income when first observed at age 55 and then how they were at age 72. Social Security benefits represented a higher share of total income for those with lower incomes in their late 50s. For those with higher income in the late 50s, non-Social Security retirement income represented a moderately higher share of their income.

More specifically, “The median share of income from Social Security was 47 percent at age 72. Reflecting the design of the US Social Security system, those with lower age 55-59 income tended to rely more on Social Security benefits in retirement while those with higher age 55-59 income tended to rely more on retirement plan distributions," they found.

One surprising result from the research was that for many individuals, retirement is a transitional process rather than a single “event,”—which is different from how it’s usually approached academically.

“Some individuals stop working well before they claim Social Security, and some continue to work well after claiming,” Brady noted. “Some begin receiving retirement income while they continue to work. They might take a different job, while others delay drawing down their retirement incomes as long as possible until they’re required to do so. It’s very complex, and the data seemed to suggest it’s a transitional process rather than that single point in time.”
It’s another indication that the concept of a retirement crisis, popular in the mainstream financial press, might be overblown.

“All we can really go on as researchers are facts,” he argued. “Let’s look at the data. No, it does not appear to be that way in the data. Most people tend to maintain a high percentage of their spendable income in retirement, and they rely on a variety of resources to do so … There’s a small percentage of people that replace a very high percentage of their retirement income [with Social Security]. We can look at those people and see if there are issues, but there’s not a widespread retirement crisis.”

THE FULL RESEARCH IS FOUND HERE.