Mismeasurement of Pensions Before and After Retirement: The Mystery of the Disappearing Pensions with Implications for the Importance of Social Security as a Source of Retirement Support
AbstractA review of the literature suggests that when pension values are measured by the wealth equivalent of promised DB pension benefits and DC balances for those approaching retirement, pensions account for more support in retirement than is suggested when their contribution is measured by incomes received directly from pension plans by those who have already retired. Estimates from the Health and Retirement Study (HRS) for respondents in their early fifties suggest that pension wealth is about 86 percent as valuable as Social Security wealth. In data from the Current Population Survey (CPS), for members of the same cohort, measured when they are 65 to 69, pension incomes are about 56 percent as valuable as incomes from Social Security. Our empirical analysis uses data from the Health and Retirement Study to examine the reasons for these differences in the contributions of pensions as measured in income and wealth data. A number of factors cause the contribution of pensions to be understated in retirement income data, especially data from the CPS. One factor is a difference in methodology between surveys affecting what is included in pension income, especially in the CPS, which ignores irregular payments from pensions. In CPS data on incomes of those ages 64 to 69 in 2006, pension values are 59 percent of the value of Social Security. For the same cohort, in HRS data, the pension value is 67 percent of the value of Social Security benefits. Some pension wealth “disappears” at retirement because respondents change their pension into other forms that are not counted as pension income in surveys of income. Altogether, 16 percent of pension wealth is transformed into some other form at the time of disposition. For those who had a defined benefit pension just before termination, the dominant plan type for current retirees, at termination 12 percent of the benefit was transformed into a state that would not count as pension income after retirement. For those who receive benefits soon after termination, there is a 3.5 percent reduction in DB pension value at termination compared to the year before termination. One reason may be the form of annuitization that is chosen. A series of caveats notwithstanding, the bottom line is that CPS data on pension incomes received in retirement understates the full contribution pensions make to supporting retirees.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18542.
Date of creation: Nov 2012
Date of revision:
Note: AG LS PE
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Other versions of this item:
- Alan L. Gustman & Thomas L. Steinmeier & Nahid Tabatabai, 2013. "Mismeasurement of Pensions Before and After Retirement: The Mystery of the Disappearing Pensions with Implications for the Importance of Social Security as a Source of Retirement Support," Working Papers wp268, University of Michigan, Michigan Retirement Research Center.
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
- I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
- J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
- J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
- J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
This paper has been announced in the following NEP Reports:
- NEP-AGE-2012-12-06 (Economics of Ageing)
- NEP-ALL-2012-12-06 (All new papers)
- NEP-DEM-2012-12-06 (Demographic Economics)
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- James M. Poterba & Steven F. Venti & David A. Wise, 2011.
"The Drawdown of Personal Retirement Assets,"
NBER Working Papers
16675, National Bureau of Economic Research, Inc.
- Poterba, James M. & Venti, Steven F. & Wise, David A., 2011. "The Drawdown of Personal Retirement Assets," Working Paper Series rwp11-006, Harvard University, John F. Kennedy School of Government.
- Poterba, James M. & Wise, David Alsgaard & Venti, Steven F., 2011. "The Drawdown of Personal Retirement Assets," Scholarly Articles 4677548, Harvard Kennedy School of Government.
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