The Importance of Social Security Benefits to the Income of the Aged Population

Social Security benefits are the most important source of U.S. retirement income. Over time, however, trends in employer-provided pension offerings, societal changes, and Social Security program rule changes have altered the distribution of income by source among the aged population. Some researchers have argued that the Current Population Survey (CPS) does not properly measure income from retirement accounts and thus overstates reliance on Social Security income. To address such concerns, the Census Bureau revised income-related questions for the 2015 CPS. This note examines reliance on Social Security benefits among people aged 65 or older as measured by the 2015 CPS and two other major surveys. All three surveys report that roughly half of the aged population live in households that receive at least 50 percent of total family income from Social Security and about one-quarter of the aged live in households that receive at least 90 percent of family income from Social Security. Introduction The traditional major sources of retirement income in the United States--often called the three-legged stool or the three pillars--are Social Security benefits, employer-provided pensions (including retirement accounts), and income from assets or savings. Social Security is a social insurance program that provides an inflation-indexed lifetime annuity to aged beneficiaries. In addition to enjoying the protection provided by indexing, a prospective beneficiary who delays claiming Social Security benefits essentially purchases additional longevity insurance--reducing the risk of running out of savings--by raising his or her lifetime monthly benefit (Shu, Payne, and Sagara 2014; Shoven and Slavov 2012). Many observers regard Social Security benefits as the base of retirement income, particularly because benefits are a steady and reliable resource for almost all aged households (Brady, Burham, and Holden 2012; American Council of Life Insurers, American Benefits Council, and Investment Company Institute 2013; Poterba 2014). Because Social Security benefits represent a substantial portion of the income of Americans aged 65 or older (Social Security Administration [SSA] 2002, 2012, 2014, 2016a, 2016b), accurate measurements of that portion are important to researchers and policymakers (Banerjee 2013; Employee Benefit Research Institute 2013; Miller and Schieber 2013, 2014). Using data from the Current Population Survey (CPS), SSA estimates that in 2014, about 84 percent of people aged 65 or older received Social Security benefits; and among those in the bottom 40 percent of the income distribution, benefits accounted for an average of around 84 percent of total income (SSA 2016b). Some analysts have criticized the use of CPS data to underlie such estimates. Research has suggested that the CPS does not adequately measure income from certain sources--in particular, income from retirement accounts, such as individual retirement accounts (IRAs) or defined contribution (DC) plans (Miller and Schieber 2014). Specifically, researchers have argued that estimates based on CPS data were likely to overstate older Americans' reliance on Social Security benefits and to understate their reliance on income from retirement accounts, particularly among lower-income respondents. In response, the Census Bureau changed the income questions in the 2015 CPS, aiming to account more accurately for income drawn from retirement accounts. In addition, trends in recent decades in employer-provided pension offerings, societal changes, and Social Security program rule changes may have affected the relative importance of different income sources for older Americans, particularly that of Social Security. Thus, it is important for policymakers to have an accurate picture of the composition of retirement income so that any proposed changes to Social Security may better address the needs of the aged. This article assesses the extent to which Americans aged 65 or older rely on Social Security benefits. …