Sunday, July 23, 2017

Lies, damn lies, and statistics

Intentional false narrative?

Lost in the numbers and not knowing what they mean?

Confirmation bias?

Here's the sort of thing one has to do in order to take any data seriously when the data are quoted by the mainstream media. It's amazing how many times data are used in a way that is totally inappropriate simply because the user doesn't really know how the data is derived.  It may be generous to attribute the misuse of the data to ignorance if there is any reason to believe that it is being misused to create a false narrative. It also seems legitimate to assume that any time a reporter is creating a narrative; they have ceased to be qualified as objective reporters of statistics.

You may not care about the data discussed below, but the demographic (retirees or people over 65) being characterized by the data is growing demographic and one we all aspire to eventually join. If you don't care, you might want to scroll through this posting just to see how crazy the media’s fascination with creating narratives has become. To those who find the topic boring I just state, “In my defense, I would point out that I made a career out of this sort of thing and analyzing forecasting techniques. Silly career, but a lot of fun. I just can't break the habit.”

Unfortunately, once Moody's decided that they were going to retire me, I've been unable to find anybody to pay me for such nonsense. The best I've been able to do was back in September of 2010 when I published six articles analyzing how people were forecasting the impact of the stimulus package. I'm quite proud of those publications since I think I did better than most of the forecasters. I was thinking of doing the same with respect to the CBO estimates of the impact of healthcare proposals, but I decided I’d just do the analysis for my own edification. I don't think anybody really cares what the impact of the proposal will be, and I know from dealing with CBO that they could care less. Everyone seems to be obsessed with the politics rather than the results. I’d probably get flamed by one side or the other.

It's interesting that I was publishing on an Internet investment forum on a fairly regular basis. I got a lot of positive feedback and probably made some people some money. I stuck my neck out and made some recommendations which sometimes worked out and sometimes didn't. But, no one ever flamed me even when they disagreed. It seems people are more willing to lose money than have someone disagree with them on politics, and it's much easier to misinterpret the data to justify your politics than to deceive yourself about whether you've lost money.

When trying to plan for retirement, here's some data to consider:

Two articles (articles, not editorials) quoted different numbers for what they represent as being the same concept. In the United States, is the average (median) retirement income $30,158 or is it $18,657?  Both numbers were quoted recently in two articles which obviously were trying to make two different stories out of the concept. So, let’s look into what the real numbers are when properly defined. It turns out that the number that best represents the concept relevant to the articles is before tax money income available to people over 65. It is probably about $23,000 ($22,887 is one estimate discussed below), but that is income of people over 65 which is different from retirees income. That figure didn't support either of the arguments the articles were trying to make, and both articles confused people over 65 with retirees.

It's interesting that the use of poorly defined terms was unintentional. Both referred to the median as average which is appropriate when talking about income distributions. However, if the article that used the higher figure had instead used the mean, it would have made their case look even stronger. (Using a mean income involves more than just a different calculation; it also necessitates use of different source data. It's inappropriate both because it's a wrong calculation to show representativeness in a skewed distribution and because it would necessitate using data sources that don't really focus on the concept most appropriate to the discussion.).

However, even when measured and defined properly the concept of before tax money income of those over 65 has limitations. First and foremost, those over 65 are receiving significant non-monetary income in the form of Medicare and the tax-advantaged treatment of Social Security payments. What would be more useful would be a measure of the effective monetary and nonmonetary income of those over 65. That's the concept that would be most generally useful.

The figure of $22,887 is probably relevant to comparing current retirees to other generations of retirees, but only those that retired since the passage of Medicare. Even there it ignores changes in both Medicare and Social Security that made them more generous for some retirees. It's totally inappropriate for comparing current well-being between age groups since different age groups receive different forms of public-sector support. It's particularly inappropriate for comparisons to poverty since both those living in poverty and those over 65 are receiving significant non-money benefits. (Poverty also tends to be temporary whereas being over 65 is permanent). 

Household income of over 65

One article said “in the United States, the average retirement income was $30,158.” The term “average retirement income” is used rather loosely here because this is actually the median household income before taxes for all persons who are 65 and older, whether they are retired or not. This figure is estimated directly from United State Census Bureau reports.

Here’s the problem.  A household's income can be calculated in various ways but the US Census, as of 2009, measured it in the following manner: the total of the incomes of all residents of that house who are over the age of 15, including wages and salaries, and/or any kind of governmental entitlement such as unemployment insurance, disability payments, Social Security, or child support payments received, along with any personal business, investment, or other routine sources of income. The residents of the household do not have to be related to the head of the household for their earnings to be considered part of the household's income.

The sum of the income of all people 15 years and older living in the household significantly distorts the measure. If the household consists of a couple where one of the partners is younger than 65 but not the head of the household, the income of the younger partner is included in household income.

Further, a household includes related family members including children over 15 and all the unrelated people, if any, such as lodgers, foster children, wards, or employees who share the housing unit. For example, if adult children are living with their parents who are over 65, household income for the over 65 household is a combination of the income of the parents and children. By contrast, if the adult children live alone in a housing unit, there would be two households whose combined incomes would equal the one household where the adult children live with the parents. If a group of young adults who were unrelated live together sharing a housing unit, it is counted as a household where the household income is the combined income of all the people sharing the housing unit.

AARP also did an estimate of household income for what they referred to as retirees and came up with a roughly similar figure. It was just over 31K. It's interesting that they picked that number. It is one of the higher estimates. It leaves the impression that AARP is more interested in representing itself as a convenient marketing vehicle to reach individuals with disposable income than as an advocacy group for a demographic group that needs an advocate. Interestingly, as described below, other advocacy groups for retirees that don't also act as a direct marketer use a lower estimate to represent the income of those over 65.


Income of individuals over 65

The Pension Rights Center calculates a number for income of all individuals over 65 whether working or not. In 2015, 47.7 million Americans were age 65 and older. Half of all older adults had less than $22,887 in yearly income from all sources.

Measuring income for persons, rather than by households, understates the resources available to some persons and overstates the resources available to others. For example, the income from a pension received by the husband is attributed entirely to the husband, even though that income may be shared by the husband and wife. This measure has the advantage that it does not include persons younger than age 65, who would be included in a household measure. However, this measure still focuses on an age group rather than retirees. Retirees are an employment status not an age group.

Income of Older Adults without Earnings

Individual income of retirees is much lower than household income or individual income when the focus is people who are totally retired and over 65. The average retirement income is probably a lot less than you think. As surprising as it might sound, the average American’s retirement income is barely over $1,500 per month or about $18,000 annually, according to the Pension Rights Center. This figure is for people who are totally retired and breaks down as follows:

About one out of five older adults (23% by one estimate) has income from earnings. In 2015, people 65 and older who are fully retired have a median income of $18,657. The amounts were similar among all older age groups.
Table 1. Median income, by age, with no earnings, 2015

These figures raise an interesting question related to the $4,000 difference between the median income of those who are totally retired and the total population over 65. Is $4,000 the value that people over 65 on average attach to the difference between being totally retired versus partially retired, or does it reflect a hardship imposed on those who can't but would be willing to work after age 65?  If it is the latter, it has major implications for how work should be structured for a population that will include the growing demographic group over 65. Data on those over 65 actually working and surveys about whether those over 65 would accept work indicate that structural limitations are real and disproportionately affect the 65 to 70-year-old group.

It would be equally reasonable to argue that the difference between the average income of all people in all age groups and the average income of those who are totally retired represents the value people attach to not having to work. However, that makes assumptions about the productivity of workers in different age groups that don't square with reality. Further, it ignores the reality that the value of not working changes as one ages, perhaps raises a family, and accumulates assets.

Income of those over 65 estimated independent of household definition

The Pension Rights Center also estimates a measure it calls the “Income of Aged Units.” That figure comes much closer to the Census Bureau estimate of household income and the AARP estimate. It estimates the median income for aged units 65 and older was $30,193 in 2014.  

Median income is higher for aged units than for persons because aged units may include more than one person, and an aged unit could include someone younger than age 65 who was still working. Aged units include single persons age 65 and older, and married couples. The age of the married couple is the age of the husband if he is 65 or older. If the husband is younger than age 55 and the wife is age 65 or older, the age of the married couple is the age of the wife.

This unit of measure allows an assessment of the income of older adults independent of the household in which they are living. Thus, if a single older woman is living with her children, her income as an aged unit would consist entirely of her own income. Thus, this measure may understate the economic resources available to some single older adults. However, age units do seem to approximate taxable entities, and they are probably the unit most relevant to many considerations. The limitation of the age unit measure is that it still includes some people who are less than 65 years old, but it significantly reduces that measurement error from the household measure.

Where Does Most Retirement Income Come From?

According to the Pension Rights Center, older adults get income from the following sources:

Social Security: 85 percent of people 65 and older get Social Security. The average Social Security income in 2014 was not quite $1,300 according to Smart Asset. According to the SS Administration the median Social Security payment is just over $1,294 per month, but they quote that figure without being clear about whether it includes early retirees who are less than 65 years old.

Assets: Sixty-three percent of retirees rely on assets other than their pension for retirement income. According to Retirement USA, the median amount of asset income for households where either the householder or spouse was aged 65 or older was $1,542 per year ($129 per month) for those households who received any asset income. (Their estimate that 63% of those over 65 are receiving income from assets is a bit higher than my estimate which was done quite a few years ago when I had access to a variety of data sources, but it does seem realistic and is consistent with estimates that I saw for 2008. While the exact portion has to be estimated, what is not in doubt is that income from assets is the second most prevalent source of income after Social Security. The dollar figure estimate of $1,542 is representative if it's appropriate to include a large number of individuals whose investment income may be nothing more than interest on small savings account. But 401(k) data, mutual fund data, brokerage fund data, and the Federal Reserve Bank survey of consumer finance all indicate that it is not much higher than $1,542 if one makes reasonable assumptions about the return on the investments shown in those data. There is one problem with these data sources. They all ignore the potential to pull out the capital as a source of cash flow and thus miss regular-emergency sources of money).

Pensions: A mere 32 percent of us have pensions and this number is trending further downward. While it's common to complain that pension payments are lower than earnings and in some cases a very minor source of income, realizing that the vast majority of people over 65 have NO pension changes the perspective.

Earnings: 23 percent of older Americans have work income. There are many indications that the working portion of the population over 65 will increase. Those indications include the stated plans of those 55 to 65 in age, the actual tendency for the working portion to be higher (over twice as high) among those 65 to 70, the fact that the age required to get full Social Security benefits is above 65 for those currently retiring, and the necessity to keep working indicated by the failure of many baby boomers to accumulate any savings/investments to supplement their retirement income. According to the AARP, currently the median income earned by retirees from work is $25,000 a year. Note that this is the highest amount of any income source.

Public Assistance or Veteran’s Benefits: About 7 percent of retirees are getting monetary help from government sources.

These figures are roughly comparable with data from a variety of other sources including both public and private sector data. The conclusion of the Pension Rights Center is: “retirees today are more dependent than ever before on Social Security income. One of the biggest problems with that approach, aside from the fact that the program isn’t incredibly stable, is that Social Security was never intended to be a primary source of income. It was intended as a boost.”

Average Social Security Retirement Income

The Social Security Administration claims that for most people, Social Security is the largest source of retirement income. The majority of retirees (65 percent) get half or more of their income from Social Security. Over a third (36 percent) of people age 65 and older receive at least 90 percent of their income as a monthly Social Security payment. While those claims are representative, there is a problem with them. They're using retired and over 65 as interchangeable and they are not interchangeable. There are people between 62 and 65 who have retired voluntarily or not.  Also, a significant portion of the population 65 to 70 works full or part-time (recently that portion of the 65 to 70 population working at some point during the year has been more than 50%).

In 2014, the average monthly retirement income from Social Security was $1,294. That’s just $15,528 per year in Social Security benefits. ABC News reports that while the average retired worker in 2014 received $1,294 per month in Social Security earnings, the average couple received $2,111. So, the average couple is receiving $1,055 per person per month or only $12,660 per year for each person.

Social Security benefits are on average smaller for a number of groups. If one doesn’t have 35 years of work when starting benefits, if earnings were consistently low, or if benefits started at age 62 rather than waiting until your full retirement age, then the monthly check is smaller and the benefit is probably below the median.

In general, single people depend more heavily on Social Security checks than do married people. Perhaps married couples are more likely to have someone working and are more prone to have accumulated assets. They also may be more likely to have someone with a pension. Further, as noted above, the per person Social Security benefit is lower for couples than an individual. Finally, single Social Security recipients include the survivors of couples. Those survivors are often older, less able to work, and have had more time to deplete their assets.

Many people claim that the more money one made during ones career, the greater the gap between income needs and Social Security benefits. I don't doubt that that's perceived as true, but if you think about it, it's quite silly. The more money one made during ones career the more likely it is that one has accumulated most of what one needs. It seems that the more one has, the more one wants unless one consciously resists the temptation.

One is left with the impression that most of what is written about retirees incomes isn't interested in conveying facts. There is a different agenda at work. It may be present their organization is vital to the well-being of retirees or to advance a commercial interest. They all avoid important issues that ultimately will determine the well-being of retirees.

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