An analysis of whether an individual’s finances will be adequate for retirement needs should include a clear understanding of what post-retirement income is being compared against since such measures can vary greatly, a report has said.
The report by the Congressional Budget Office focused specifically on Social Security benefits but in that context warned that an evaluation of retirement income adequacy “is not a clear-cut task.”
Some such gauges, it said, are designed to measure how income would compare with “essential living expenses” such as those used for determining the government’s official poverty level. In 2018, the poverty threshold for a single person age 65 or older was $12,043, and the threshold for two people was $15,178. By that measure, it said, Social Security alone provides for an adequate retirement income for the “vast majority” of long-career workers, although less so for those with relatively short working careers.
However, other measures of retirement income adequacy “are used to determine the extent to which benefits enable retirees to maintain their preretirement standard of living.” Further, there are two ways to conduct that comparison, it said: by comparing only earnings just before retirement or by comparing earnings in all working years.
It added that a look at retirement adequacy also should take into account the reduction in payroll taxes that active employees pay toward Medicare and Social Security or other retirement programs, as well as the reduction in federal and state taxes due to having lower income levels in retirement.