ICI Viewpoints

Critics of the current retirement system often claim that Americans have insufficient income in retirement and that the system’s voluntary component is failing, leaving retirees too reliant on Social Security.¹ While these assertions are used to justify proposals to overhaul employer plans and individual retirement accounts (IRAs), they aren’t supported by data.²

Spendable Income Holds Up in Retirement

In a new study looking at Americans’ income from age 55 through 72, we found that the typical retiree maintains more than 90 percent of their average age 55–59 inflation-adjusted spendable income, thanks to both Social Security benefits and retirement plan distributions.^3,4 Contrary to the conventional wisdom that most retirees rely on Social Security alone, we found that three out of four Americans receive retirement plan distributions at age 72.

How much an individual earns in their working years has a large impact on their sources of income in retirement. Those with the lowest income in their late 50s typically get all their income at age 72 from Social Security benefits. However, the importance of retirement plan distributions increases rapidly as pre-retirement income rises. Outside the bottom quintile of the age 55–59 income distribution, 85 percent of individuals receive income from retirement plans at age 72.

The System Is Working as Designed

The composition of retiree income is driven largely by the design of the US retirement system. Social Security is a mandatory pension with a progressive benefit formula that replaces a much higher portion of earnings for lower-income workers. Income from employer plans and IRAs is meant to supplement Social Security benefits. Not surprisingly, higher-earning workers rely more on retirement plan distributions because Social Security benefits replace a lower share of their pre-retirement earnings.

Although the importance of retirement plans varies with each worker’s lifetime earnings, most Americans maintain a high share of their spendable income in retirement. In fact, those who had lower income in their late 50s typically replace a higher share of their spendable income in retirement, despite being more reliant on Social Security. At age 72, lower-income Americans typically have replacement rates above 100 percent, meaning their spendable income in retirement exceeds that of their late 50s. Middle-income Americans also enjoy very high replacement rates at age 72—typically ranging between 90 percent and 95 percent.

Building Upon the System’s Success

The combination of mandatory Social Security and voluntary retirement plans has enabled millions of American retirees to maintain the standard of living they had while working. While further reforms to employer plans and IRAs ought to be considered, those reforms should build on strengths of the current voluntary structure. The evidence warrants caution when proposing fundamental changes to a system that works well for most retirees.
 

 
Notes