Thank you very much for coming today. I think well get started. Welcome to all the American Enterprise institute. Im andrew biggs. And todays session is titled what can irs data tell us about Retirement Income. I can imagine a bgrade thriller movie that the tag line said what if everything you knew were wrong. This is a slightly modified version. The tag line might be, what if many of the things you know were wrong and what if many of those were about Retirement Incomes . Its not something quite as thrilling but something thats actually very, very important. And i think the fact is that much of what we think we know about Retirement Incomes, the statistics that drive Government Policies regarding Social Security and Retirement Plans may in fact be wrong. We think we know what retirees incomes are, what their poverty rates are, how dependent they are on Social Security benefits and how much they receive from private Retirement Plans. I can pull some of those statistics from my head. The poverty rate is a little under 10 . And a third of the retirees receive a third of their income from Retirement Benefits. Those statistics that i know, based on the data currently used. Some of the statistics are wrong because the data theyre based on may be incorrect. In particular, the Household Survey data gathered by the government which asks people about their sources of income and retirement systematically understates the income that people receive from retirement pensions, 401 k s, iras, et cetera. The result is we may come to skewed conclusions as to how well off retirees are compared to other groups. We may believe that retirees are becoming dangerously dependent on Social Security benefits of the private Retirement Plans have failed and retirees today are unable to retain the standard of living they enjoyed prior to retirement. The two studies presented today try to come to a more accurate view of Retirement Incomes by using more accurate data. In the process, they tell a story that for a policy wonk at least is close to astonishing. Based on government tax records, the income for the typical retiree household is nearly one third higher than we previously thought. Poverty is substantially lower, and the typical retiree has an income very close to what he or she enjoyed prior to retirement. Thats good news. It shows americas retirement system in a new light. We dont know what the future will bring in light of increasing lifespans and the decadelong shift to defined Contribution Plans like 401 k s. And they dont make predictions regarding those future outcomes. But more accurate data do seem to show that americans Retirement Incomes would need to drop a great deal further before we could consider our retirement system to be in crisis. Im very happy to welcome our two presenters. Our first is peter brady, a senior economist in retirement. Following peter will be joshua mitchell, who is a senior economist at the u. S. Census bureau. Thank you very much for coming and welcome to aei. But both pete and josh are presenting group work. Petes study is coauthor is steven bass of ic and Jessica Holland and kevin pierce of the intern revenue service. Josh is coauthored with adam bee of the Census Bureau. We will have discussions. The first discussant will be kevin moore of the Federal Reserve board. Our second discussant will be bruce meyer. A visiting scholar here at aie. Thank you both for coming today. Following discussants comments, well allow for brief interchange between participants and turn to your questions. At this point, id like to begin with our presentations. Pete, we have between 20 and 25 minutes, then well go to josh. Thank you very much. Thank you, andrew, and thank you all for showing up today. As andrew already mentioned, this is a joint work and my coauthor is actually sitting in the front row. This paper is a product of the soi joint Statistical Research program. Our paper examines two questions. First, are workers able to maintain their standard of living after they claim Social Security benefits. To answer that question, were going to look at changes in spendable income around the time they claim. Secondly, where do retirees get their income from after they claim Social Security. And to answer that question were going to look at the incidents and amounts of incomes they get from different sources. The reason we undertook this research is that the Social Security system and tax deferral for Retirement Plans are important components of the u. S. Tax and transfer system. They generate most of the income retirees rely on. Its very important for policymakers and administrators to understand how these programs are working. Its particularly important because there are many proposals to change one or both of these programs. And a lot of these proposals are promising the idea that theres a retirement crisis. That is workers are not accumulating enough resources while theyre working to maintain their standard of living of they retire. What did we find . Well we find that actually moos are able to maintain their inflationed adjusted net income after they retire and the individuals who are the lowest income when we first reserve them tend to replace the highest percent tanl of thage of that i. Where do they get their income . In addition to Social Security, it turns out that most that we observed from income from the pensions annuities and iras, what we refer to as Retirement Income. And indeed most in the sample are going to rely on a mix of Social Security benefits and this Retirement Income. So the plan for today is im going to describe a little bit of the data. Were going to look at the income changes in retirement and then im going after claiming Social Security and then im going to look at where the individuals get their income from and then a brief discussion on if we can discern where the pension annuity income, what is generating that income. Okay. So the data we use is a panel data set, a 1999 to 2010 panel. It starts with a representative sample of all taxpayers in 1999. Its going and were going to look at all individuals who are either a primary or secondary taxpayer in a joint return or primary taxpayers on a john joint return. We want to observe them before they claim Social Security, we want to observe them claiming and then look at what happens after that claiming incident. What were going to focus on is people age 55 to 61 in 1999, just below the early retirement claiming age who are working and not yet receiving any Social Security benefits. And then what we want to look at is what happens after they claim Social Security. One nis thing about focusing on this particular group is that the tax data appear to be representative of this group that were studying. Okay. So if you look at all individuals age 55 to 61 and you compare the number on the tax returns and the number in the population counts, over 95 file a tax return. And when you look at what were looking at, which are those who are still working and havent claimed Social Security, the percentage is closer to 100 . So we think most of the people who we want to look at are going to be in the tax data 99 and then they do not need to they have to file a tax return in the 9, you dont have to file a tax return later in the years to stay in the sample. We can measure using information returns. Grabbing wages and salary from the w2, Social Security numbers and the pension and ira distributions from the form 1099i. So were going to we define the year the first year were receiving Social Security income as a claiming year and we refer to that as year t and then the fiveyear period starting one year before you claim and three years after the year that you claim. The when we rank individuals were going to rank them by 99 income. When theyre all working and before any of them claim Social Security, the income were measure in the tables were showing you can be from the late as 2010 but were going to rank individuals by their 99 income when we show the income results. So theres 12. 5 Million People in the tax data that meet our criterion of being 55 to 61 in 99, working, not having Social Security benefits. What were going to analyze is the 59 who claim between 2000 and 2007. And the reason is we need to observe their data three years after they claim. What that excludes are about 19 who are going to claim who we observe claiming in 2008, 09 and 10. About 5 who claim Social Security disability benefits before they claim Social Security disability benefits. About 13 this summarizes all you need to know the go forward in the presentation. Were looking at people close to the early retirement age, early retirement claiming age who are working without Social Security income and then were going to follow anyone who claims through 2000, 2007. Okay. So we can go to the first question. What happens to suspendable income. Many studies of retirement will focus on how much of peoples income or how much peoples earnings they can replace in retirement. But economic theory suggests that people dont have a goal of replacing income or replacing earnings. In english what they want to do is maintain their standard of living. So at most what that would mean is they want to maintain how much spending they have in real terms, inflation adjusted terms. Although its also possible that they may be able to maintain their standard of living even if spending declines. So what were going to look at, we cant measure spend in our data but were going to look at spendable income. What we mean by spendable income is what people have left over after theyve saved and paid their taxes. The tax data do not allow us to measure you know accurately measure savings as a whole but we can measure the Retirement Plan contributions and payroll taxes and federal income taxes. Now the results im going to show you today, im going to focus on what we called workrelated income. What that includes is labor income, wages and salaries from work but it also includes income from two other sources that ultimately are generated by working. And thats Social Security benefits and distributions from pensions, annuities and iras. And what its going to exclude is basically other income, taxable income, rents, royalties, business income, farm et cetera. Since were focused on workrelated income, our measure of spendable income is going to be met workrelated income. So the next few slides what im going to show you are what happens to mean spendable income around the time of claiming. Recall that year t is the year in which we observe people claim Social Security benefits. And it can be anywhere from 2000 to 2007. And then we look at years around that. The income measures are all inflation adjusted and theyre also per capita. Which means that for a married couple in a joint return, we split the income equally. So what this slide shows is that most people are able to maintain their spendable income per person after retirement. Total work related income actually declines by about 4400 but taxes decline by 3600. So on net what you see is the spendable income, the blue portion of the bars stays roughly constant over the time. In the next few slides what were going to look at is how this differs by individual 1999 income. The lower 20 of 1999 income, they actually experienced on average a 29 increase in spendable income. For those in the middle this is about income stays about flat and you dont start observing declines until you get to the higher income individuals, the 80th to 95th percentile. Half of the individuals in the sample are working three years after claiming Social Security. So the next two slides look at whether work status affects these results. And what you see is that bigger increase for the lowest actually experience a 43 increase in spendable income, for the middle of workers who continue to work, their net spendable income is about constant. And you see a decline at the top but its a fairly modest decline. If we look at what happens to those who arent working three years later, the lower income actually still have an increase in spendable income, average spendable income but its much more modest, 11 . We see income in the middle stay about constant and spendable income at the top declines substantially if youre higher income who no longer work. Okay. So that shows us the mean on average, gives you an idea of whats happening but theres a wide variation among people that the means can mask. So to look at how things vary and what the different experiences of people are, we actually calculate for every individual in the sample a replacement rate. And the replacement rate were looking at is a replacement of spendable income. And in particular were focused on Network Related income. All of the replacement rates im going to show you in the next few slides, and well go somewhat quickly. The denominator is spendable income in year t the year before they claim and then look at how that relates to the income in later years. The next few slides will show the drix of the results of everyone in the sample. The blue box is the median. Everybody in the first year, the median replacement rate of spendable income is 106 , the green dots represent the 25th and 75th percentile, 25 have a replacement of 88 or lower and 28 have a replacement of 126 or higher. And now if you go through t plus 3, the median stays constant although theres a slight increase in the spread of results. What i want to focus on again is year t plus 3 but im going to look at it by income. Its the same slide, were going to do it by income. The bottom 60 up through the middle of 99 income, replacement rates on average, the median is over 100 . The other thing you see is that theres a general decline. 99 increases replacement rate and the distribution shifts down. Again, about half of the individuals are working three years later so we want to see whether working and not working affects results. And what you can see is that fsh those who are this shows those who are working three years after claiming Social Security and what you can see is they have a higher replacement rate and the way you see that is that the entire distribution tends to shift up. You prepare the average, look at those working, it tends to shift up. But again you see the pattern where the highest replacement rates tend to be at the bottom and it slowly goes down. Those who arent working three years later tend to have lower replacement rates. And you can see that because the entire distribution of the replacement rates are shifting down. The general pattern is people with lower 99 income have higher replacement rates and particularly lowest is over 100 . Okay. So we find that most people on average are going to maintain their inflation i used spending and the lower income and those who were working three years later tend to have higher replacement rates. We can turn to the second question, which is where do people get their income from and for that were going to look at incidents and amounts of income from different sources. What this slide ill sfraustrate retirement is best thought of as a transitional period instead of a point in time. So what we see from this slide, if you look at the left, is even a year before they claimed Social Security, about 15 of those in the sample have stopped working. And the shared who are working continues to climb until three years later, although nearly half are working three years later. And 61 are working or are a spouse who is working. A slow transitional period. What you also see as the amount of people working declines, the amount of people who have income from pensions, annuities and iras increase. So even the year before they claim Social Security, nearly half of individuals have income from these sources and that increases to 72 three years after they claim. And this income tends to be persistent in the 67 of those who claim in the first year, 92 of them claim all three years after claiming Social Security. So in the next few slides im going to focus on the three years after claiming and now im going to again look at it by 99 income and see what the pattern is. So what we see here is that for a large portion of the middle or upper parts, so from the 40th percentile to the 90th percentile, upper to the upper middle. Both in the top 5 and the lower 40 . If we extend this analysis out to the full fiveyear period and say how many people received the income in at least one of the five years, we get that 81 receive income from these sources. In addition, we have evidence that some of the people who never receive Pension Income have some of these resources. No particular, we can observe someone who had a 1099 r and didnt have Pension Income. Thats like a rollover to an ira. They got a dristribution but didnt roll it over. They have san ira and theyre not yet drawing down income. So the upshot of this slide is that if youre 55 to 6