Retirement experts often cite the “three-legged stool” as a framework for retirement planning, which is that income from Social Security, personal savings (such as a personal defined-contribution plan), and a defined-benefit pension are critical for a secure retirement.
How much income do older adults typically earn from each of these sources? Let’s take a look.
In 2018, according to the Pension Rights Center, 84 percent of Americans 65 and older earned income from Social Security, and the median annual Social Security benefit for those 65 and older was $15,516.
Sixty-five percent of Americans 65 and older earned income from additional assets including savings and personal retirement accounts like 401(k)s, which provide a median annual benefit of $1,795.
Let’s look at access to employer-sponsored plans. Only 31 percent of people earned income from defined-benefit pensions and only 25 percent earned income from an employer-sponsored defined contribution plan. Many state and local employees do not qualify for Social Security, making pension plans a critical source of retirement income The median annual benefit of a state and local government pension in 2018 was $22,546, and those few with an employer-sponsored plan saw a median annual benefit of $31,505.
Solely relying on income from personal savings and defined-contribution plans alone is not an optimal solution for the retirement security crisis, as almost half of Americans aged 55 and older also have nothing at all saved for retirement.
Additionally, many older adults are still in the workforce because they cannot afford to retire. According to AARP, as of February 2019, more than 20 percent of adults over the age of 65 are either working or looking for work, compared with 10 percent in 1995. Older workers are also more disproportionately impacted by the coronavirus-induced economic crisis; workers aged 55 and older have one of the highest unemployment rates, which threatens their ability to save for retirement.
Defined-benefit pensions, however, are a critical resource in reducing poverty among older adults. According to the National Institute on Retirement Security, the number of poor households aged 60 and older would have increased by 19 percent in 2013 if their income from defined-benefit pensions was eliminated, which would be a much greater increase than if income from defined-contribution plans were taken away.
It’s clear that policymakers should prioritize protecting pensions for public employees who have devoted their lives in service to their communities. They are a critical part of the three-legged stool for retirement planning and they have a proven ability to help workers retire with security and dignity.