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CCH® PENSION — 11/20/09

Asset Income Is Less Important Than Earned Income For Replacement Ratio Calculations

from Spencer’s Benefits Reports: The percentage of aggregate income for persons aged 65 or older attributed to earnings has risen in nearly 30 years from 15.9% to 26.0%, while the percentage attributed to asset income has dropped from 22.4% to 12.8%. and the percentage attributed to pension income has dropped from 19.5% to 15.3%. Aggregate income from Social Security and pensions has remained steady at about 58% over the same period, according to statistics compiled by the Congressional Research Service (CRS) from the Current Population Survey collected by the U.S. Census Bureau.

The following table shows the percentage of income from five sources that make up the aggregate retirement income for persons aged 65 and older. It provides guidance on possible sources of income for calculating potential replacement ratios:

Pension income includes money from defined benefit plans, profit-sharing plans, 401(k) plans, Keogh accounts, individual retirement accounts, military pensions, federal/state/local government pensions, and annuities.

More people aged 65 and older had earned income from work in 2008 (20.1%) than in 1980 (16.6%). The mean annual income from earnings grew from $16,410 in 1980 to $36,499 in 2008. During the same time period, earnings grew from 15.9% of aggregate income in 1980 to 26.0% in 2008. The CRS attributes this change to four factors: (1) growth in real wages; (2) increased employment among people aged 65 and older; (3) an increase in the percentage of those aged 65 or older who are employed full-time; and (4) a drop in interest and dividend income.

Income from assets is primarily from interest and dividends plus any rents and royalties, according to the CRS. In 1980, 67.1% of people aged 65 and older received income from assets, but by 2008, only 54.0% received income from assets. As a percentage of aggregate income, asset income was 22.4% of the total in 1980, but only 12.8% in 2008. The CRS noted that falling interest rates and falling dividend yields resulted in lower amounts of income and fewer people choosing to hold such assets.

The percentage of income varies depending upon how much retirement income is received by an individual aged 65 and older. People in the top income quartile (those earning more than $33,677 in retirement income per year) received 38.1% of their income from earnings, followed by 22.9% from pensions, 19.9% from Social Security, 16.8% from asset income, and 2.3% from other income. People in the second quartile (those earning between $18,208 and $33,677 in retirement income per year) received 54.6% of their income from Social Security, 22.0% from pensions, 11.7% from earnings, 9.0% from assets, and 2.9% from other income. People in the bottom quartile (those with retirement income of less than $11,139 per year) received 84.0% of their income from Social Security, 3.7% from assets, 3.1% from pensions, 2.1% from earnings, and 7.2% from public assistance and other income.

In 2006, 4.8% of people age 65 and older lived in nursing homes. Of these, 14% were age 65 to 74, 36% were age 75 to 84, and 50% were age 85 or older. Of the 95.2% of people age 65 and older not living in nursing homes, 53% were age 6 to 74, 36% were age 75 to 84, and 11% were age 85 or older.

For more information, visit http://www.opencrs.com.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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