
From The New York Times, in 2023:
“The proportion of older Americans living below the official poverty level fell drastically through the 1960s and 1970s, largely because of expansions and increases in Social Security. But there has since been a plateau.
“‘It’s not fully appreciated how persistent senior poverty has been,’ Dr. (Richard) Johnson said. ‘The decline really slowed in the 1990s and hasn’t improved significantly since.’”
And seemingly they’re right.
According to official statistics, the 9.7% poverty rate for Americans aged 65 and over in 2024 was the same as in the year 2000, showing no progress in fighting elderly poverty in over two decades.
But what if I told you these statistics were just wrong?
And for a simple reason: The federal government isn’t counting seniors’ entire incomes. An important component is largely left out.
No, this isn’t something arcane, like whether rent subsidies or health insurance should be counted as income when calculating poverty. (Some say yes, others say no.)
It’s whether what’s likely to be the main source of income of most retirees on top of Social Security, the thing that puts money in their bank account and food on their table, is counted as “income.”
I’m talking about withdrawals from retirement accounts, such as IRAs and 401(k)s.
The bizarre reality is that official government poverty statistics don’t count retirement account withdrawals as “income.” That doesn’t matter for kids or working-age adults. But it’s increasingly important for seniors, so much so that the official poverty rate for Americans aged 65, which largely ignores income from retirement accounts, is nearly double the true rate when retirement account withdrawals are included.
The most common source of data on retirees’ incomes is the federal government’s Current Population Survey. It should go without saying that the government’s main data source on retiree incomes should, you know, “count their incomes!”
Income, according to the OECD, “represents the money available to a household for spending on goods or services.”
However, the CPS measures “money income,” which the Census Bureau defines as “income received on a regular basis.”
So what is a monthly Social Security check or pension benefit, or a biweekly paycheck from a job in retirement? They’re “income.”
But what about when a retiree draws down their IRA, 401(k) or other savings as needed?
“Not income,” as far as the Census Bureau surveys are concerned.
The problem with the Census Bureau’s definition of income shouldn’t be hard to grasp, especially as retirement accounts take the place of traditional pensions. One type of retirement plan, which is counted as income, is being replaced by another plan, which isn’t counted as income.
Obviously, this can skew our perceptions of how well 401(k)s have taken the place of traditional pensions.
Official statistics on incomes and poverty are literally useless in analyzing this change to the U.S. retirement system because they all but ignore the income seniors receive from IRAs and 401(k)s, the very savings vehicles that led this change.
Fortunately (for data nerds, if not for taxpayers), the Internal Revenue Service doesn’t give a crap where you got your income from. They just want their slice of it. Which means we have some alternate data to illustrate how big a problem the CPS’s mismeasurement of retirement income is.
For instance, in 2023, the CPS reports that seniors received $583 billion in income from retirement accounts, traditional pensions and annuities. By contrast, the IRS reports that seniors receive $1 trillion in retirement account, pension and annuity income, a 72% increase. Presumably, most of that gap is from retirement account income not being captured in the CPS.
This same error applies to income from ordinary nonretirement investment accounts. As I point out in “The Real Retirement Crisis,” the Social Security Administration was aware of this reporting problem as early as 1968: A survey the SSA conducted at the time captured less than half of the investment income that seniors reported to the IRS on their tax returns. Over time, as pensions were replaced by retirement accounts, the problem only becomes more widespread.
The true poverty rate among age 65+ Americans in 2018 wasn’t the 9.75% reported in official statistics based upon the CPS. The true elderly poverty rate was just 5.75%.
Put another way, official government statistics claim the poverty rate for Americans 65 and over is nearly twice the actual rate.
Retirees don’t simply have a dramatically lower risk of poverty than official figures claim. They have a dramatically lower poverty rate than other Americans. For comparison, using the same more accurate data, the Census Bureau finds the 2018 poverty rate for children was 15.6% and for working-age adults 9.5%.
It is truly shocking that, with so much on the line regarding Social Security reform and the future of household retirement savings, we do not actually know the incomes and poverty rates of seniors in the United States today.
We know with near certainty that the official statistics overestimate poverty and underestimate retiree incomes, but we don’t know what the true rates of poverty and level of incomes are.
Andrew Biggs is senior fellow at the American Enterprise Institute and allowed this reprint of a post from his Substack, “Little-Known Facts.”