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Older Americans May Be More Financially Well Off Than Previously Thought

The typical method of learning people's financial well-being is to conduct a survey and ask them questions about their savings, assets, and income. However, people are often confused by survey questions. This is especially true when knowing what counts as income.

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For a number of years, the U.S. Census Bureau has conducted a survey to determine household income and poverty rates (Survey). In 2012, the Survey showed that, for persons age 65 and older, median household income was $33,800 and the poverty rate was 9.1%. But when Census Bureau researchers Adam Bee and Joshua Mitchell compared 2012 Survey answers against 2012 tax filings and other documented earnings data, they learned that many of these older Americans had under-reported their actual income--by quite a bit. Specifically, Bee and Mitchell found that, for 2012, their median household income was $44,400 (30% higher than indicated by the Survey answers) and their poverty rate was only 6.9%.

In a recent paper about their findings, Bee and Mitchell explain that the discrepancy arises mainly because many people do not know that distributions from defined benefit pension plans and withdrawals from 401(k) plans and Individual Retirement Accounts (IRAs) ARE income. Therefore, they do not report these sources of income when surveyed by the Census Bureau, which makes them appear to be less well off than they actually are. By way of example, if two people (Bob and Brad) receive the same monthly Social Security benefit and Bob lives solely on that amount, while Brad regularly withdraws money from a $1 million IRA account, Bob and Brad will appear financially the same in the Survey data if the IRA withdrawals are not reported as income, when, in fact, Brad is financially much better off than Bob.

Bee and Mitchell explain that when defined benefit pensions and retirement account withdrawals are taken into account, most older Americans do not experience a substantial decline in total income, or an increase in the poverty rate, following retirement as previously thought. However, Bee and Mitchell are quick to caution that one should not become too joyous about this news because their findings are based on 2012 data and more recent data may not be so rosey. In fact, given the trend towards phasing out defined benefit pension plans, which pay a guaranteed income for life, and replacing the them with defined contribution plans, which typically pay only the lump sum account balance, it is entirely possible that post-2012 retirees will be financially less well off. In their paper, Bee and Mitchell suggest that their future research will endeavor to answer this question.

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