Income Composition, Income Trends and Income Shortfalls of Older Households

For all age groups above 65, Social Security remains the primary source of income

by Sudipto Banerjee, Ph.D., Employee Benefit Research Institute

reprinted with permission from Employee Benefit Research Institute (EBRI)

Introduction

A steady, reliable source of retirement income is essential to financial security in retirement. Policymakers, employers, and financial-service providers have long tried to design policies and products that can help retirees acquire steady retirement income, but such policies and products must also respond to the constantly changing financial environment.

Furthermore, in order to adapt these policies and products for future retirees, it is important to understand the current state of income in retirement. This Issue Brief examines the income patterns of older U.S. households. Using data from the Health and Retirement Study (HRS) and Consumption and Activities Mail Survey (CAMS), this study combines both income and expenditure data to gain a more complete picture of the retirement income adequacy of current retirees. It focuses on three
different aspects of retirement income:

  • The sizes of the different components of income and their shares of total household income.
  • How the importance of each component of retirement income changes with age for different cohorts.
  • Finally, it estimates the percentage of older households with retirement incomes that are not sufficient to finance their spending needs.

Download the complete EBRI Issue Brief (PDF): Income Composition, Income Trends and Income Shortfalls of Older Households

The study also identifies the expenditure components that drive households to income deficits and identifies the key demographic characteristics of these households.

Data

As noted above, two different sources of data are used for this study. First is the Health and Retirement Study (HRS), a study of a nationally representative sample of U.S. households with individuals over age 50. It is the most comprehensive survey of older Americans in the nation, covering in detail topics such as health, assets, income, and labor-force status. It is a biennial, longitudinal survey with survey waves in even-numbered years beginning in 1992.

The initial sample consisted of individuals born between 1931 and 1941 and their spouses, regardless of their birth years. Newer cohorts have been added in the following survey years. The study is sponsored by the National Institute on Aging (NIA) and the Social Security Administration (SSA) and administered by the Institute for Social Research (ISR) at the University of Michigan.

The other data used in this study come from the Consumption and Activities Mail Survey (CAMS), which was started in 2001 as a supplement to the HRS. From the 2000 HRS, 5,000 households were selected at random and mailed the CAMS questionnaire. In couple households, the questionnaire was sent randomly to one of the two spouses. Since 2001, CAMS has been conducted every two years, with 2009 the latest round of available data.

For those between ages 55–64, the aggregate expenditures in each of the 32 categories (six durable and 26 nondurable items) of CAMS are very close to the same categories in the Consumer Expenditure Survey (CEX) , the benchmark survey on household consumption in the United States. However, CAMS reports higher consumption expenditures for older households (Hurd and Rohwedder, 2011). The household income and wealth measures are taken from the RAND version of HRS data because it provides consistent measures of income and wealth across all waves.

Income Composition

Figure 1 shows the income composition of older households between the years 2001 and 2009, by age group. It is important to note the different components of income as shown below.

  • Labor income: sum of wage and salary income; bonuses, overtime pay, commissions, tips; second job; professional-practice or trade income.
  • Capital income: sum of business or farm income, self-employment earnings, business income, gross rent, dividend and interest income, trust fund or royalties, and other-asset income.
  • Pension/Annuity income: sum of all pension and annuity payments. This includes income from defined benefit pensions, annuities, as well as income from other retirement savings such as 401(k)-type plans and individual retirement accounts (IRAs).
  • Social Security income: includes Social Security retirement, spouse, and widow or widower benefits.
  • Other income: sum of Social Security disability benefits, unemployment and workers’ compensation, veterans’ benefits, food stamps, alimony, lump-sums from insurance, pensions or inheritance.
Note that for all three age groups, Social Security remains the most important source of income, and its importance increases with age

All income figures are annual and reported at the household level, so the respondent’s and spouse’s incomes are added for a couple household. The figure reports both mean and median (mid-point) dollar amounts (in 2010 dollars) for each income component, as well as total household income. It also reports the mean percentage share of each income component in total household income. All numbers are reported for three different age groups: ages 65–74 (Age Group I), 75–84 (Age Group II), and ages 85 and above (Age Group III).

Note that for all three age groups, Social Security remains the most important source of income, and its importance increases with age. For example, in 2001, households in Age Group I derived half of their income from Social Security while households in Age Group III derived almost 70 percent of their income from Social Security. These shares did not change much over the 9-year period studied. In 2009, the shares for Social Security income for Age Groups I and III were 54 percent and 66 percent, respectively. Also, due to the progressivity of the Social Security benefit formula, mean and median benefits from Social Security are very close

Pension, Annuity income second-most important for most older households

Note also that income from pensions and annuities is the second-most important source of income for most older households. The share of pension and annuity income increases from Age Group I to Age Group II, but then falls for Age Group III. For example, in 2009, the shares of pension and annuity income were 17.1 percent for Age Group I, 18.4 percent for Age Group II and 15.3 percent for Age Group III. There also exist large differences between mean and median incomes from pensions and annuities. In 2009, the mean of pension and annuity income were $11,612, $9,682 and $4,917 for Age Groups I, II, and III, respectively, while median pension and annuity incomes for all three age groups were zero, because only a share of the older population receives such income.

Labor and capital are the other two important sources of income for older households. Labor income is a significant part of income for Age Group I, but, as expected, the share of labor income falls rapidly with age. In 2001, households in Age Group I derived 11.4 percent of their income from labor earnings, but for Age Groups II and III the shares were 2.6 percent and 0, respectively. These proportions did not change much across the years studied.

On the other hand, capital income remains a steady source of income for all age groups; in 2001, capital income’s share remained almost unchanged at about 13 percent for all age groups, while in 2009, the share represented by capital income actually increased, from 9.9 percent for Age Group I to 13.8 percent for Age Group III. Income from other sources remains small and declines with age.
Total household income expectedly falls with age, and there remain large differences between mean and median household incomes.

The presence of a few large earners drives this difference between mean and median household incomes, but mean and median incomes of older households did not change much throughout the past decade. For Age Group I, the 2001 average and median household incomes were $50,975 and $34,192, respectively. For the same age group in 2009, mean and median household incomes were $52,970 and $37,201, respectively, while for Age Group III mean household income increased from $24,199 in 2001 to $25,741 in 2009, and median household income increased from $16,761 to $19,623 during the same period.

 

Download the complete EBRI Issue Brief (PDF): Income Composition, Income Trends and Income Shortfalls of Older Households