Pension Income Remains Crucial for Today's Retirees

Across all income groups, retirees are collecting more in retirement income from employer sponsored retirement plans today than they were in the mid-1970s, according to a new report by the Investment Company Institute (ICI).

The study found that the share of retirees with private-sector pension income nearly doubled between 1975 and 2015. Moreover, the median income received by people with private-sector retirement income is up by more than 50%.

“Contrary to popular belief, private-sector pension income has become more prevalent over time, not less prevalent,” says Peter Brady, ICI senior economist and coauthor of the report. “This report refutes the myth that the period before the emergence of 401(k) plans in 1981 represented a ‘golden age’ of pension coverage and income—a belief that seems to be the basis of many retirement policy discussions.”

However, the paper also found that coverage by a defined benefit (DB) plan does not always result in retirement income. ICI says that although many retirees may have worked for companies that offered DB plans at some point in their careers, the combination of vesting rules, the timing of benefit accrual, and labor mobility resulted in many retirees getting little or no retirement income from these plans, according to the paper.

ICI notes that in 1975, when nearly 90% of private-sector pension plan participants were covered by DB plans, only 21% of retirees received any income—either directly or through a spouse—from private-sector pensions. Among those with private-sector retirement plan income, the median amount received per individual was about $5,000 in constant 2015 dollars.

In 2015, 42% of retirees received private-sector retirement plan income, and their median per capita amount of income increased to $7,800. 

ICI concludes that “evidence suggests that retirement plan income continues to be under-reported in the survey data used to analyze retiree income, and thus, the increase of pension income since the Employee Retirement Income Security Act of 1974 (ERISA) may be understated.”

Furthermore, the paper found that Social Security remains the largest component of retiree income and the predominant income source for lower-income retirees. In 2015, Social Security benefits represented 52% of total retiree income and more than 85% of total income for retirees in the lowest 40% of the income distribution. Even for retirees in the highest income quintile, Social Security benefits represented nearly 30% of income in 2015.

ICI’s paper analyzes data on annual income from the Current Population Survey, a monthly survey conducted by the Census Bureau for the Bureau of Labor Statistics (BLS). Every March, the BLS supplements the typical monthly survey questions with the Annual Social and Economic Supplement (ASEC), a special set of detailed questions on the components of income which is one of the most widely used sources for statistics on annual income.

The BLS recently revised the ASEC questionnaire in response to growing evidence that income, including pension retirement income, was under-reported in the survey. ICI’s paper also includes an appendix, which provides additional information about the changes to the survey questionnaire and the impact those changes had on the reporting of pension income.

A Look at Private-Sector Retirement Plan Income After ERISA, 2015, was coauthored by Brady and Michael Bogdan, ICI associate economist.