Question Err?

“Presumably, if workers earned income in a retirement account, it is safe to assume that they had a retirement account…”.

Ya think?

That somewhat self-evident statement is drawn from a recent Issue Brief by the non-partisan Employee Benefit Institute (EBRI). That it was necessary is a cautionary tale about the blind reliance on data, even from a credible source, that looks suspicious.

It relates to the Current Population Survey (CPS), Annual Social and Economic Supplement (fielded in March of each year) to the CPS, conducted by the U.S. Census Bureau – a report that had long been one of the most cited sources[i] of income data for those whose ages are associated with being retired.

‘Bold’ Move

The problem appears to have its roots in a well-intentioned attempt to provide a more accurate read on income from DC plans. Responding to research that indicated that the CPS misclassified and generally underreported income, particularly pension income, the Census Bureau in 2014 conducted a redesign of the CPS questionnaire that altered and added to questions on income in order to better capture income from pensions.

To do so, the authors of this survey added (IN BIG BOLD LETTERS) an instruction that respondents NOT INCLUDE DISTRIBUTIONS OR WITHDRAWALS FROM IRAS, 401(k)s, or SIMILAR ACCOUNTS. This “clarity” does, in fact, seem to have produced a more accurate read on that specific question. The reporting of pension income that year, and in subsequent iterations, has risen.

However, beginning with that version of the CPS, there was a commensurate sharp drop in both the overall percentage of workers participating in a retirement plan, a decline in the number of workers participating, and declines in participation among those most likely to participate. This result, by the way, was counter to other reputable data sources, including the upward trend in the number of active participants in private-sector plans according to tabulations of Form 5500 filings by the Employee Benefits Security Administration, findings on retirement plan participation from the Bureau of Labor Statistics’ National Compensation Survey (BLS-NCS).

Fall ‘Call’

How much did it drop? The EBRI report explains that for full-time, full-year wage and salary workers ages 21-64, the percentage participating in 2013 under the traditional questionnaire was 54.5% vs. 49.3% under the redesigned questionnaire. This number fell to 39.9% in 2018 despite a slight uptick to 41.4% in 2017. Moreover, the number of full-time, full-year wage and salary workers ages 21-64 estimated to be participating in an employment-based retirement plan decreased from 51.4 million in 2013 (under the traditional design) to 41.0 million in 2016. By the way, the number of active participants increased from 89.9 million in 2014 to 94.6 million in 2017 according to 5500 data.

So why did the question regarding pension income translate into such enormous declines in participation? Well, you have to engage in a bit of speculation, but the trend and the timing suggest that individuals responding to the CPS, told to exclude 401(k)s, 403(b)s, IRAs, etc. on the question regarding pension income basically applied that direction to questions regarding their participation in a plan.

Gap ‘Flap’?

The good news is that this aberrant result was caught almost immediately by EBRI, and later by groups such as the Investment Company Institute. And, when a subsequent version came out with the same aberrant results, those groups once again held that up to scrutiny. And yet, that CPS data was still “out there,” and for some constituted the “official” version of the state of retirement plan participation in the United States.

That said, the newest iteration of the CPS included a new question that might be a step along the way to a more accurate assessment. Specifically, EBRI researcher Craig Copeland notes that in the 2019 dataset, the CPS added variables relating to income earned in a retirement account – and that addition, coupled with the assumption that began this post, provides some hope for an accurate data read.

That additional question simply posits whether the respondent received interest income, and from what source(s) – including 401k, 403b, among other retirement accounts. Copeland has taken the number of workers who responded that they received income from one of the employment-based retirement accounts and added that to the number of workers who reported having a pension plan under the traditional questions (accounting for those responding yes to both) to provide an adjusted overall estimate of employment-based retirement plan participation.

What’s the Impact?

Recall for a moment the data on fulltime, full-year wage and salary workers ages 21-64, that had indicated a 54.5% participation in 2013, only to drop below 40% in 2018 with the new questionnaire. However, taking into account the information from the new question, Copeland finds that the adjusted percentage participating jumps to 59.0% for this group in 2018. Similar, positive results are found for the other categories as well – results, it should be noted, that are much more in line with other data sources.

Now, despite those positive results, Copeland cautions since this is just one year of data, “a trend is obviously indeterminable.”

That said, I can’t help but be reminded about that old story about the optimistic child who awakens on Christmas morning and finds a heap of horse manure under the tree, rather than the anticipated – and still responds, “With all this manure, there must be a pony somewhere!”

Seems as though Dr. Copeland has found a pony in this data, after all.

- Nevin E. Adams, JD

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[i]See Data ‘Minding. Compounding the issues, for participation data, the NIRS draws on the Current Population Survey (CPS), even though the report’s own footnotes acknowledge that “the 2014 redesign of CPS produced much lower participation rates for working Americans in years after 2014 (participation in 2014 was at 40.1% but at 31.7% in 2017), which has not been fully explained.” They aren’t the only ones to take note of this aberration (see CPS Needs a New GPS and Commonly Cited Participation Gauge Misses the Mark, Study Says), but decide, for reasons not fully explained, to rely on the data there anyway. Indeed, a June 2018 report on the impact of the changes in the CPS by the nonpartisan Employee Benefits Research Institute (EBRI) cautions that “the estimates from the most recent surveys could easily be misconstrued as erosions in coverage, as opposed to an issue with the design of the survey.”

Data "Minding"

Just when you thought retirement plan projections couldn’t get any worse…

Last week the National Institute on Retirement Security released a report – “Retirement in America | Out of Reach for Most Americans?” that claimed that the median retirement account balance among all working individuals is… $0.00. Moreover, that same report claims that “57 percent (more than 100 million) of working age individuals do not own any retirement account assets in an employer-sponsored 401(k)-type plan, individual account or pension.”

It’s not the first time the NIRS has produced reports finding significant problems with the nation’s private retirement system. Indeed, this report “builds on previous NIRS research published in 2015,” though the conclusions presented here seem unusually stark.
Then, as now, the NIRS conclusions rely heavily on self-reported numbers from the Federal Reserve’s Survey of Consumer Finances (SCF) and the U.S. Census Bureau’s Survey of Income and Program Participation (SIPP). The report’s authors acknowledge that the latter “oversamples” lower-income household which, as the report notes, are less likely to be covered by, or to participate in, an employer-sponsored retirement plan.

‘Self’ Sufficient?

The issues with self-reporting have been well-documented – so much so that even the report’s authors acknowledge (albeit in a footnote) that it “…can be problematic for the reporting of account balances and participation in particular types of retirement plans, such as DB pension plans.” In fact, previous research by Irena Dushi, Howard M. Iams and Jules Lichtenstein using SIPP data matched to the Social Security Administration’s (SSA’s) W-2 records found that the DC pension participation rate was about 11 percentage points higher when using W-2 tax records compared with respondent survey reports, “suggesting that respondents either do not understand the survey questions about participation or they do not recall making a decision to participate in a DC plan.” Those authors also found inconsistencies between the survey report and the W-2 record regarding contribution amounts to DC plans. In fact, those researchers found that about 14% of workers who self-reported nonparticipation in a defined contribution (DC) plan had, in fact, contributed (per W-2 records), while 9% of workers self-reported participation in a DC plan when W-2 records indicated no contributions.

Supplementing SIPP survey reports with actual information on tax-deferred contributions in W-2 records, the researchers found that the percentage of employees who were offered a retirement plan increased from 72% in 2006 to 75% in 2012, whereas the participation rate in any retirement plan among all private-sector workers increased from 58% to 61% over this period (a difference that may seem small, but is statistically significant at the 5% level).

Participation, Rated

Compounding the issues, for participation data, the NIRS draws on the Current Population Survey (CPS), even though the report’s own footnotes acknowledge that “the 2014 redesign of CPS produced much lower participation rates for working Americans in years after 2014 (participation in 2014 was at 40.1% but at 31.7% in 2017), which has not been fully explained.” They aren’t the only ones to take note of this aberration (see CPS Needs a New GPS and Commonly Cited Participation Gauge Misses the Mark, Study Says), but decide, for reasons not fully explained, to rely on the data there anyway. Indeed, a June 2018 report on the impact of the changes in the CPS by the nonpartisan Employee Benefits Research Institute (EBRI) cautions that “the estimates from the most recent surveys could easily be misconstrued as erosions in coverage, as opposed to an issue with the design of the survey.”

Moreover, when it comes to assessing retirement readiness, the NIRS analysis extrapolates target retirement savings needs based on a set of age-based income multipliers – income multipliers, it should be noted, that have no apparent connection with actual income, or with actual spending needs in retirement, although this year the report’s authors acknowledge that those are “rule-of-thumb multipliers and are not based on detailed projections of the income needs of individuals,” all of which, in the authors’ words means that their “analysis in aggregate terms, is broadly suggestive rather than definitive.”

Median, Well…

However, much of the data – and key elements, such as wealth, income, participation and retirement savings – that underlie the conclusions is “self-reported” which, as noted above, even the report’s authors acknowledge “…can be problematic…”. It is perhaps a necessary “evil” when seeking to draw broad-based conclusions from limited samplings, but – particularly when sweeping generalizations are posited based on the medians of such samplings, when labels like “typical” are affixed and assumed without explanation – well, let’s just say that caution in applying the conclusions seems well-advised.

Not that the report is completely off the mark; it points out that those with access to retirement plans are significantly better off than those who lack that access, but also that retirement plan coverage has languished at about the 40% level in the private sector for some time now. Clearly solutions that help work to close this coverage gap, and provide more workers with an easier opportunity to save (let’s face it, nothing stops folks from walking down to their local financial services institution and opening an IRA, but the data suggests that those with access to a plan at work are 12 times more likely to do so) are needed.

Ultimately, the recommendations put forth by the NIRS report authors – to strengthen social security, expand access to workplace retirement plans, and expand the saver’s credit – should serve to narrow the gaps in retirement plan access and adequacy.

Even if the data that outlines the situation – and purports to justify those actions – leaves something to be desired.

- Nevin E. Adams, JD

Crisis "Management"

Rarely a week goes by that a headline, survey or academic paper doesn’t proclaim the reality of a retirement crisis with the certainty generally reserved for topics like the existence of gravity, or the notion that the sun will rise in the east.

And certainly based on the data cited, there would seem to be a compelling case that trouble lies ahead for many. That said – as was pointed out by Andrew Biggs at the recent Plan Sponsor Council of America conference – the reality is that good, reliable data is hard to come by. Indeed, many of the reports cited in those headlines rely on what you would expect to be a reliable source; the Census Bureau’s Current Population Survey, or CPS.¹ Unfortunately, that reliable source turns out to be not-quite-so-reliable. It suffers from relying on what people tell the survey takers, but perhaps more significantly, Biggs, resident scholar at the American Enterprise Institute, pointed out that the survey only counts as income in retirement funds that are paid regularly – like a pension. “Irregular” withdrawals from retirement accounts – like IRAs and 401(k)s – aren’t included.

In fact, when you compare what retirees report to the IRS with what they report to the Census Bureau, only 58% of private retirement benefits are picked up, according to Biggs. Now, who do you suppose gets a more accurate read; the IRS² or the Census Bureau? And yet, the CPS data serves as the basis for a huge swath of academic research on retirement savings.

Social ‘Security’

Biggs noted that IRS data also draws into question some of the “common wisdom” on things such as dependence on Social Security. Consider that the Social Security Administration – who arguably has “skin” in the game – claim that a third of retirees are heavily dependent – to the tune of 90% or more of their income – on Social Security. However, a study based on IRS data found that only 18% of retiree households are heavily dependent on Social Security, and just one in eight retirees receive 90% or more of their income from Social Security. Don’t get me wrong – Social Security is clearly a vital and essential component of our nation’s retirement security – but the IRS data indicates that, for most, it isn’t a primary source at present.

Pundits have long worried that retirees wouldn’t have accumulated enough to live on in retirement, but data suggests that most retirees aren’t exactly burning through their retirement savings. Not that some aren’t drawing down too rapidly, mind you – and that’s a valid concern. But many, perhaps most – aren’t.

Data suggests that today’s retirees are actually in pretty good shape. In addition to the IRS data cited above, that sentiment is borne out by any number of surveys (perhaps most notably the Retirement Confidence Survey, published by the nonpartisan Employee Benefit Research Institute (EBRI) and Greenwald Associates) that continue to find that those already in retirement express a good deal more confidence about their financial prospects than those yet to cross that threshold. And certainly, the objective data available to us suggests that today’s retirees are better off than previous generations, though their retirement – and potential health issues – may at some point take a toll.

Still, in 2014, EBRI found that current levels of Social Security benefits, coupled with at least 30 years of 401(k) savings eligibility, could provide most workers — between 83% and 86% of them, in fact — with an annual income of at least 60% of their preretirement pay on an inflation-adjusted basis. Even at an 80% replacement rate, 67% of the lowest-income quartile would still meet that threshold — and that’s making no assumptions about the positive impact of plan design features like automatic enrollment and annual contribution acceleration.

Not that there isn’t plenty to worry about; reports of individuals who claim to have no money set aside for financial emergencies, the sheer number of workers entering their career saddled with huge amounts of college debt, the enormous percentage of working Americans who (still) don’t have access to a retirement plan at work (though not as enormous as some claim)…

That said, I shudder every time I hear an industry leader or advisor stand up in front of an audience and proclaim that there is a retirement crisis – because, however well-intentioned – they are almost certainly providing “aid and comfort” to those who would like to do away with the current private system as a failure, not a work in process.

What seems likely is that at some point in the future, some will run short of money in retirement, though they may very well be able to replicate a respectable portion of their pre-retirement income levels, certainly if the support of Social Security is maintained at current levels.

However, what seems even more likely is that those who do run short will be those who didn’t have access to a retirement plan at work.

- Nevin E. Adams, JD
 
Footnotes

1. Nor is that the only shortcoming in that widely utilized source. The nonpartisan Employee Benefit Research Institute (EBRI) has pointed out that a change in survey methodology in 2014 has produced some questionable plan participation results from the CPS – a finding subsequently validated by the Investment Company Institute. ↩
2. Not that IRS data can’t be misapplied. ↩

"Half" Measures

People are often grouped into one of two camps: the optimists, who generally see the glass as half-full, and the pessimists, and who are said to view the glass as half-empty.

One of the most commonly cited data points about retirement is that “only about half of working Americans are covered by a workplace retirement plan.” Drawn from the U.S. Census Bureau’s Current Population Survey (CPS), it’s cited by both those who see the current system as inadequate (or worse), as well as its most ardent champions—in other words, both by those who see the glass as half-full, and those who are inclined to see it as half-empty.

This is a data point that we’ve written about before, and one that was acknowledged in a recent EBRI Issue Brief[1] that explored various demographic and economic factors that affect retirement plan participation. The data point is relatively simple math: the number of workers who say they participated in a workplace retirement plan divided by the total number of workers. But when you take a closer look at the numbers, it’s not really that straightforward—especially since there are various types of workers, and that makes a huge difference in retirement coverage.

Consider that, according to that CPS data, in 2012, a total of 80.5 million workers worked for an employer/union that did not sponsor a retirement plan. However, the EBRI analysis reveals that of the wage and salary workers in this group:

• 8.9 million were self-employed—and thus ostensibly could have started a plan on their own without the action of an employer.
• 6.4 million were under age 21—below ERISA’s minimum-age coverage limit.
• 4.3 million were age 65 or older—beyond what many (and most retirement plans) still consider ”normal” retirement age.
• 32.6 million were not full-time, full-year workers—also not required to be covered by a workplace retirement plan under ERISA.
• 17.0 million had annual earnings of less than $10,000.

Now, many of these workers fell into several of these categories simultaneously, such as being under age 21, having less than $10,000 in annual earnings, and not being full-time, full-year workers. So, as the EBRI analysis explains, once you apply certain commonsense filters for age, annual earnings, work status, and/or employer size, you can get a more realistic perspective.

If you consider the population of wage and salary workers ages 21–64 who work full-year, make $5,000 or more in annual earnings, and work for employers with 10 or more employees, 32.5 million—or 36.4 percent of this population—worked for an employer that did not sponsor a retirement plan in 2012.

Said another way, nearly two-thirds of workers with those characteristics worked for an employer that DID sponsor a retirement plan in 2012. Either way, the population of workers who don’t have access to a workplace retirement plan who might reasonably be expected to participate is considerably different than the simplistic assessment offered by the commonly cited “less than half” data point.

Different people can look at the same data and draw different conclusions: some are inclined to see the glass as “half full,” others look at the same results and say it’s “half empty.”

But none of that matters if you’re looking at the wrong size glass.

Nevin E. Adams, JD

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[1] The November EBRI Issue Brief, “Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2012” is available online here.

Covered "Call"

Sooner or later, at just about every retirement plan conference, you’ll hear someone—and generally more than just one someone—cite the statistic that “only about half of working Americans are covered by a workplace retirement plan.”

It’s a data point that is widely and openly presented as fact—not only by those inclined to dismiss the current system as inadequate (or worse), but even by some of its most ardent champions, who see it as a call to action for expanded access to these programs. It’s drawn from the U.S. Census Bureau’s March 2012 Current Population Survey (CPS).(1) But does it tell the full story?

A recent EBRI Issue Brief notes that in 2011, 78.5 million workers worked for an employer/union that did not sponsor a retirement plan. Looking specifically at those who did not work for an employer that sponsored a plan, the report notes that:

• 8.9 million were self-employed (and were thus barred from having a plan by their own inaction).
• 6.2 million were under the age of 21 (below ERISA’s mandated coverage level).
• 3.9 million were age 65 or older (beyond “normal” retirement age).
• Just over 31 million were not full-time, full-year workers.
• 16.8 million had annual earnings of less than $10,000.

Taking those factors(2) into account, it’s not hard to see why a large percentage of the 78.5 million people who worked for an employer that did not sponsor a plan—roughly 66.8 million in 2011, based on the CPS estimates above—might not be covered by a workplace plan for reasons that have little to do with the efficiency or efficacy of the current retirement plan structure.

When you filter out the overlap between those categories—situations where workers fall into several of those categories simultaneously (for example, workers who are under age 21, have less than $10,000 in annual earnings, and who are not a full-time, full-year worker)—there are about 42.4 million workers whose lack of coverage might be attributed to being in one or more of those categories. And yes, that’s more than half of the “uncovered” workers in the CPS analysis.

Indeed, while claiming that “fewer than half of working Americans have access to a workplace retirement plan” might be technically accurate, doing so exaggerates the size of the coverage “gap”—and obscures factors that might actually help explain it.

Nevin E. Adams, JD

(1) A similar result can be gleaned from the National Compensation Survey from the Bureau of Labor Statistics.

(2) There are other factors linked to rates of participation. For example, the EBRI Issue Brief also notes a correlation between firm size and participation. See Figure 30 in “Employment-Based Retirement Plan Participation; Geographic Differences and Trends, 2010.”