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Retiree Income is Higher Than We Thought

By W. Andrew Larson, CPC

Trigger warning: This blog post highlights some good and, sadly, unheralded-news about retiree income, Social Security dependence and poverty among the elderly. If good new is upsetting to you please don’t continue.

Maybe you missed it but some good retirement-related news came out recently. It seems that retiree income is actually higher than previously thought, according to a study by the Social Security Administration (SSA) . In fact, according to the information, retiree income levels where quite a bit higher than reported in other studies. In this blog we will review these findings and explore why retiree income was undercounted according to the SSA. Our source of information is the study, Improving the Measurement of Retirement Income of the Aged Population.

This ORES Working Paper No. 116 published by Irena Dushi and Brad Trenkamp came out in January 2021.Before we dig into the data, it is important to understand the entities  involved with this study. As noted, the study was an “ORES” paper. ORES is the Office of Research, Evaluation and Statistics of the SSA. The paper was unique in that it compiled data from multiple sources to obtain as complete a picture of retiree income as is feasible. To date the most commonly used data on retiree income is published by the Census Bureau and is known as the Current Population Survey (CPS) Annual Social and Economic Supplement (ASEC) . The ORES study extended the retiree income exploration beyond the ASEC data and included IRS database information along with the  Health and Retirement Study (HRS). Once the data was compiled a more complete view of retiree income was noted with clearly positive findings.

ORES compared the various data sets to determine if the ASEC study accurately captured retiree income sources and levels. When the multiple data sets were compared with the ASEC report it was apparent that certain retirement income sources were not being taken into account. Surprisingly, the missing income pieces included distributions from IRAs, qualified plans and pensions. When these elements were added to the calculations retiree income increased by about 30 percent . To quote the study “…[the study] showed that the difference in estimated income is mainly due to underreporting of retirement income (from both defined benefit pensions and defined contribution retirement account withdrawals) and that the discrepancy in median income between survey and administrative data increased from about 20 percent in 1990 to about 30 percent in 2012. This finding reveals that the discrepancy, attributable mainly to CPS’s failure to capture retirement account distributions, arose at a time when retirement accounts and withdrawals from such accounts became more prevalent.”

This makes sense; as time goes on, retirees will have had additional time to accumulate retirement assets in IRAs and qualified accounts and the gap should increase if changes in the ASEC methodology are not forthcoming.

The ORES data also demonstrates somewhat less dependency on Social Security retirement benefits. Policymakers have expressed concern over the numbers of retirees who have virtually no retirement income or assets other than Social Security benefits. Specifically, in the original ASEC report 26 percent of retirees receive at least 90 percent of their income from Social Security benefits. Once the additional retirement savings income is included, this number decreases to 12 percent−clearly a big improvement on the Social Security dependency issue.

Recall the original intent of the Social Security system was the reduction of poverty among the elderly. Under the study, if we look at the most expansive data set, the post-age-65 poverty rate is 7.1 percent. Certainly, by that standard, the system can claim success in reducing the poverty rate.

Retiree Income Range Percentage
Less than 5,000 0.8
5,000–9,999 3.6
10,000–14,999 5.5
15,000–19,999 5.6
20,000–24,999 5.6
25,000–29,999 5.3
30,000–34,999 5.2
35,000–39,999 5.8
40,000–44,999 4.7
45,000–49,999 4.3
50,000–74,999 18.2 62.7%
75,000–99,999 12.5
100,000 or more 23.0

Conclusion

In summary, the SSA’s ORES paper has provided positive insights into how retirees are faring from an overall income perspective. These figures illustrate the current retirement system’s ability to help most (nearly 63%, see above) workers create a reasonable-more than $40,000 per year- retirement income. The system is not perfect but it is increasingly effective at delivering adequate retirement outcomes to most workers. That said let’s not be complacent; we can do more to support workers efforts towards achieving retirement income security.  Initiatives could include more auto enrollment and escalation features, practical retirement and financial education and innovative retirement income products. Gloom and doom may sell media advertising but let’s take some comfort in the fact that the retirement system seems to be on a better path that we may have thought.

 

© Copyright 2021 Retirement Learning Center, all rights reserved
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Suspending Social Security retirement benefits

My client, who is 62 years old, just lost his job. He wants to file for Social Security retirement benefits and look for new employment. A friend told him he could suspend his Social Security benefits at a future date if he found new employment and, by suspending his benefits, he would not need to repay Social Security benefits already received. Is that correct?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Ohio is representative of a common inquiry related to Social Security benefits.

Highlights of the Discussion

No, that is not correct. “The friend,” although well-meaning, is mixing up a couple of key Social Security concepts.

Social Security retirement benefits can be stopped in two ways. The first method is referred to as the “withdrawal of application” and the second is “suspension of benefits.” Each has unique rules as noted below.

Withdrawal of Application

  • Must occur within 12 months of filing for benefits
  • The individual may elect this one time only
  • All benefits received must be repaid
  • Future benefits will be calculated as though the initial filing never occurred

Suspension of Benefits

  • Can occur only after reaching full retirement age and before age 70
  • No repayment is required
  • Delayed retirement credits are available prospectively until age 70

Thus, for a 62-year-old, because the individual has not reached full retirement age the only way to stop Social Security retirement benefits is through a withdrawal of application, which requires the repayment of benefits.

Conclusion

The rules related to Social Security withdrawal of application and suspension of benefits are complex, and other issues such as family benefits and Medicare considerations may come into play. Anyone contemplating theses decisions should seek expert advice from a tax and/or legal advisor.

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SSA’s “Heads Up” on Private Pension Benefits

“My client received a notice from the Social Security Administration (SSA) titled, ’Potential Private Pension Benefit Information.’ Why did he receive this form and what does it mean?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Pennsylvania is representative of a common inquiry related to notices from the SSA.

Highlights of the Discussion

  • Your client received a Form SSA-L99-C1, Potential Private Pension Benefit Information from the SSA to inform him that he “ … MAY be entitled to some private pension upon retirement.” His family may be entitled to retirement or survivor benefits as well.
  • He received the form because, when an individual files a claim for Social Security benefits, the SSA automatically issues this notice to alert the individual that the SSA has knowledge of potential other retirement benefits that he or she may be entitled to receive under a defined contribution plan and/or defined benefit plan maintained at his former private employers.
  • According to a study,[1] 26 percent of terminated individuals over a 10-year period left their assets in their former employers’ plans, which equated to 61 percent of plan assets in motion. One reason for this may be that former participants with higher plan balances are more likely to leave their plan balances behind than those with smaller plan balances.
  • Your client may already be well aware of these additional benefits—and may have already received some of or all of them. But if not, you should review the plan information on the notice with your client and contact the plan administrator identified to make a claim for any benefits that may be due.  Some or all of these benefits may be eligible for rollover.
  • The SSA keeps a database of individuals who have been identified by the IRS as having qualified retirement plan benefits under private employer-sponsored plans. When a former employee leaves behind accrued retirement benefits in an employer’s retirement plan, the employer must report such information to the IRS.
  • The information on the SSA form is somewhat limited. Fortunately, the Department of Labor (DOL) put together a helpful Q&A piece on this topic FAQs on SSA Potential Private Retirement Benefit Information.
  • Your client can contact the DOL with additional questions as well either on-line at “Ask EBSA” or by calling 1-866-444-3272.

Conclusion

Consider the Form SSA-L99-C1, Potential Private Pension Benefit Information  issued by the SSA, as a friendly, “heads-up” notice regarding private retirement benefits to which an individual may be entitled.

[1] Alight, “What do workers do with their retirement savings after they leave their employers,” 2018

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Social Security and Economic Impact Payments

“My client is retired, receiving Social Security benefits and hasn’t filed a tax return for the last couple of years. For those collecting Social Security, how will the IRS issue Economic Impact Payments to these individuals?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from New Jersey is representative of a common inquiry related to Covid-19 Economic Impact Payments

Highlights of the Discussion

According to an April 1, 2020, press release from the Treasury Department, Social Security beneficiaries who are not typically required to file tax returns will not need to file any additional forms or information in order to receive an Economic Impact Payment. Instead, payments will be automatically deposited to recipients’ bank accounts.

The IRS will use the information on the Form SSA-1099 and Form RRB-1099 to generate the Economic Impact Payments to Social Security recipients who did not file tax returns in 2018 or 2019. Recipients will receive these payments as a direct deposit or by paper check, just as they would normally receive their benefits.

Conclusion

Recipients of Social Security benefits who don’t file tax returns should automatically receive their Economic Impact Payments based on their Forms SSA-1099 and Form RRB-1099 in the form of a direct deposit or paper check.

© Copyright 2021 Retirement Learning Center, all rights reserved