Will Retirees’ Incomes Be Enough? It Depends On What You Count As Income.

The Center for Retirement Research at Boston College, with whom I have collaborated on a number of projects, has just released version 2.0 of its famous National Retirement Risk Index (NRRI). The latest-and-greatest NRRI projects that 47 percent of Americans aged 30 to 59 are at risk of insufficient incomes in old age. Are things really that bad?

There are a lot – and I mean a lot – of variables that go into projecting whether a retirees will have incomes sufficient to maintain their pre-retirement standard of living. It’s really complicated and reasonable people will disagree.

But it’s worth focusing on a single and simpler issue: What counts as income? That turns out to be less straightforward than you might think. And the differences are big enough to matter.

The NRRI is based upon the Federal Reserve’s Survey of Consumer Finances (SCF), a household survey of Americans’ assets and incomes. For context, the 2019 SCF states that the median household aged 65 and over had a total cash income of $46,579. Including the “implicit rent” from home equity, which effectively allows a retiree to live rent-free, boosts the median income to $50,329.

However, the National Retirement Risk Index doesn’t include every source of income that’s in the Fed survey. The NRRI counts “income from Social Security, defined benefit [pension] plans; financial assets both in defined contribution (DC) plans and saved directly; and housing.” All of that is fine.

However, the NRRI excludes several sources of income that are included in the Survey of Consumer Finances. The NRRI does not count earnings in retirement; income from farms, businesses and other non-financial investments; and transfer income, which includes government welfare payments as well as alimony and child support.

How much do these omissions matter?

If we subtract the value of earnings, farm and business income and transfer income, as the NRRI would do, the median 65+ household income falls from $50,329 to only $35,047. That’s a big difference when we’re thinking about whether seniors will have enough to get by in old age.

The NRRI omits earnings in retirement because they don’t last throughout retirement, which is true. But earnings made up 23 percent of the total incomes of all 65+ households in 2019. That’s a lot of money. And having that money lets seniors delay drawing down their savings, which helps explain why retirees aren’t running out of money in old age.

Likewise, roughly one-fifth of senior households receive farm or business income, which for these households makes up nearly one-third of their total incomes. That substantially exceeds what they receive from combined Social Security benefits and private retirement plans.

It’s a similar story with transfer income, which was received by 19 percent of the over-65 population in 2019, according to the Fed survey. For those households, transfer payments made up nearly one-fifth of their total incomes.

While different retiree households see their incomes reduced for different reasons, the net effect would be to mistakenly cause us to think these seniors won’t have enough to get by in old age.

All of this may look like a statistical he-said, she-said debate – who knows who’s correct? But the NRRI dates back to 2006. At that time, the NRRI projected that 35% of households born from 1946 to 1954, who currently are aged 69 to 77, had inadequate retirement savings. But today, with those households in the heart of retirement, we just don’t see major financial problems. Retirees’ incomes are at record highs and poverty at record lows. Eight-in-10 current seniors tell Gallup they have enough money to “live comfortably.” Only five percent tell a Federal Reserve survey they are “finding it hard to get by.” In the SCF, sixty-one percent of that age group reported not even spending their entire income. The omission of certain categories of retirement income may explain why the long-predicted crisis hasn’t occurred.

There’s a common view of retirement income as simply Social Security plus a 401(k). In reality, U.S. seniors draw income from a wide variety of sources. Projections of retirement income adequacy need to take all those income sources into account. Otherwise, we could live in fear of a retirement crisis that may not ever occur.