How sturdy is today’s retirement ‘three-legged stool’?Excerpts from a new report from the National Institute on Retirement Security (NIRS) examine the sources of income for retirees today. Reprinted with permission. Read the full report here.
Retirement security is built on a foundation of secure income during retirement. For decades, researchers, financial advisors, and others have encouraged working Americans to pursue the so-called “three-legged stool” of retirement savings: Social Security; a defined benefit pension; and individual savings, typically through a defined contribution plan.
This report examines the actual sources of retirement income for older Americans to find out, in part, just how many older Americans actually achieve on the three-legged stool in retirement. This report also considers how sources of retirement income vary according to different demographic characteristics including gender, race, and educational attainment. Different groups of older Americans do not receive the same amounts of retirement income or even retirement income from the same combination of sources.
Finally, this report assesses how different sources of retirement income affect poverty status and the likelihood of experiencing a material hardship, such as food insecurity, during retirement. Among the report’s key findings: • Only a small percentage of older Americans, 6.8 percent, receive income from Social Security, a defined benefit pension, and a defined contribution plan (the three-legged stool).
One Legged Stool
A plurality of older Americans, 40.2 percent, only receive income from Social Security in retirement.
- Roughly equal numbers of older Americans receive income from defined benefit pensions as from defined contribution plans. This is likely to change in the future as fewer private sector workers have access to defined benefit pensions now than in the past.
- Defined benefit pensions have a much greater povertyreducing effect than defined contribution plans. This may be partly due to the fact that recipients of defined contribution income tend to have much higher net worths than the recipients of defined benefit income.
- Unmarried older men and unmarried older women receive retirement income from similar combinations of sources, but the older men consistently have higher incomes than the older women. Both unmarried men and women have lower retirement incomes than married older men and women.
- Race and educational attainment both have very strong roles to play in determining retirement outcomes. Whites have consistently higher retirement incomes than blacks or Hispanics, and those with a college degree have significantly higher retirement incomes than those with only a high school education. Race and educational attainment also intersect in meaningful ways.
- Expanding Social Security benefits would be a potent poverty-reducing tool for policymakers to implement to fight elder poverty
The Meaning Of Security
When retirement policy experts and financial advisors talk about saving for a secure retirement, they often talk about maintaining one’s standard of living in retirement. What exactly does maintaining one’s standard of living mean though? In part, it means avoiding falling into poverty or experiencing material hardships, such as food insecurity or high housing costs, in retirement.
This report examines several different sources of income in retirement and how the receipt of income from those sources helps retirees to avoid both poverty and material hardship. Retirement policy experts used to speak of a “three-legged stool” of retirement savings: Social Security; a defined benefit pension; and individual savings, typically through a defined contribution plan. While it is becoming increasingly rare for a worker to participate in all three types of plans, this does broadly describe the three main sources of income that may be available in retirement.
According to the Social Security Administration, nearly 90 percent1 of Americans age 65 and older receive Social Security benefits. While pension coverage has declined in recent decades, 22 percent2 of all workers in the United States participated in a pension plan in 2017. According to the federal Bureau of Labor Statistics, 64 percent of private sector workers in 2018 had access to defined contribution plans, either alone or in combination with a defined benefit pension.3 These three different types of retirement plans are not the same, though. Social Security is a social insurance program meant to provide a floor so workers do not fall into poverty in retirement.
Defined benefit pension plans are an employer-provided retirement benefit meant to replace a certain portion of pre-retirement income. Defined contribution plans, such as 401(k)s, 403(b)s, IRAs, and others, are individual savings plans that were originally intended to supplement pensions. While an employer may sponsor and contribute to a defined contribution plan, workers are responsible for deciding whether to participate and how much to contribute in addition to managing the investment of the money and deciding when to withdraw their savings in retirement. The idea behind the three-legged stool was that receiving income from all three sources provides the most security in retirement. Relatively few retirees (6.8%) have income from all three sources, so this report examines what sources of income retirees do have. This report focuses on households where the head of the household is age 60 or older and no one in the household works 30 or more hours per week. We will also examine persons age 60 or older who do not work 30 or more hours per week. This is important because the economic security of older households with full-time workers may be due more to their employment income than their retirement income.
We will consider several different sources and combinations of retirement income:
- Social Security only,
- Defined Benefit only,
- Defined Contribution only,
- Social Security and Defined Benefit,
- Social Security and Defined Contribution,
- Defined Benefit and Defined Contribution,
- Social Security, Defined Benefit, & Defined Contribution, and
- No income from any of these three sources
To begin, we will determine what percentages of older households receive income from these various combinations. Then, we will examine these income combinations along several different demographic characteristics: gender, race, age cohort, net worth, and educational attainment. We will stay on the subject of educational attainment and retirement income for a while because the two track closely together, i.e., those with higher educational attainment tend to have more retirement income. To get a sense of how pre-retirement income and wealth affects income in retirement, we will consider the amounts of retirement income in the context of the net worth of the individual (excluding retirement savings from net worth). This gives an indication of whether those individuals with high pre-retirement earnings are benefitting from certain combinations of retirement income more than low-income or middle-income earners.
Read the NIRS full report- Examining The Nest Egg, here