Economic Snapshot | Retirement

Growth in Social Security wealth outpaces all other sources

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Snapshot for May 25, 2005.

Growth in Social Security wealth outpaces all other sources

For almost all Americans, retirement security requires a reliance on a combination of Social Security, pensions, and private savings.  With radical changes to Social Security under debate in Congress and the erosion of private pensions in the headlines, it is important to understand how the sources of Americans’ retirement income have changed over time.  These trends are discussed in detail in EPI’s new book, Retirement Income: The Crucial Role of Social Security.

The typical American nearing retirement (age 56 to 64) saw a 30% improvement in retirement security between 1989 and 2001, as their wealth grew from $438,900 to $569,100 (in 2001 dollars).  Social Security provided a larger addition to this wealth than any other source. 

Increase in mean wealth for middle-income households ages 56 to 64, between 1989 and 2001

The chart shows that Social Security wealth—the foundation of workers’ retirement income—increased by $77,600, or 59%, between 1989 and 2001.  In 1989, Social Security wealth was 30% of all retirement wealth, and it increased to 37% in 2001. 

Another important source of retirement security, private pension wealth, includes both defined-benefit (DB) plans (that provide retirement income based on pay and years of service) and defined-contribution (DC) plans like 401(k)s (that are based on individual accounts with pre-tax employee deductions and that sometimes include employer contributions, as well).  Over the last 20 years, there have been large declines in the number of DB plans and even larger increases in DC plans. Unfortunately, individuals bear much more risk with a DC plan than a DB plan.  So even though from 1989 to 2001 pension wealth increased in real terms by $24,100, or 23%, for middle-income households near retirement, as a share of total retirement wealth it actually declined from 24% to 23%, despite the tremendous rise in the stock market that should have benefited those with DC plans.  In the end, the growth in pension wealth was less of a factor in guaranteeing retirement security than was Social Security.

Other wealth—which includes wealth from housing/real estate, savings, cash, money market accounts, bonds, the cash surrender value of life insurance plans, and stocks—increased $28,500, a modest 14% overall.  As a percent of total retirement wealth, middle-income Americans saw their other wealth decrease as a share of total retirement wealth from 46% in 1989 to 40% in 2001.  Rises in the stock and housing markets had little effect on typical middle-income Americans because they had little invested in the stock market (outside of a 401(k) or similar plan) and their increased home equity was offset by higher home borrowing.

These trends clearly outline the crucial importance of Social Security to those nearing retirement and should give policymakers pause before pushing changes that transform the program’s guaranteed benefit into significantly riskier private accounts.

To learn more about today’s new EPI study, see Retirement Income: The Crucial Role of Social Security by economists Christian Weller and Edward Wolff.

This Snapshot was written by EPI Deputy Director of Policy Amy Chasanov.

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