President Obama has indicated that income inequality will be the signature issue of his second term. This is a powerful political message even though, if true, it is an indictment of his five years in office. However, is the increase in income inequality based on fact or is it based on flawed and misleading government statistics?
How does anyone know the incomes of 300 million Americans? It would appear that there are two sources. First, there are figures compiled by the Census Bureau that appear in the annual Current Population Survey, or CPS. These figures represent estimates based on census questions. The second source comes from the IRS and is based on the total of all individual income tax returns.
Not surprisingly, these sources yield very different results and can be subject to much interpretation or spin depending on one’s point of view. Just recently the Wall Street Journal published an article by two former high officials in the Social Security system. The opinion page article, “Retirees Aren’t Headed for the Poor House,” showed an incredible difference in the CPS and IRS figures on retirement income.
For example, in 2008, the CPS reported that retirees took $5.6 billion out of their IRAs. Yet, in that same year retirees reported to the IRS that they took $111 billion out of their IRAs. In that same year, retirees showed $222 billion in pension and annuity income, according to the CPS but actually reported $457 billion to the IRS. That is a huge disparity.
What explains the difference? The CPS only considers retirement income received on a regular periodic basis but fails to include as-needed, lump-sum withdrawals from IRAs and 401ks. The IRS figures are much more accurate, but inevitably politicians and pundits will choose to rely on the Census Bureau figures. Already Democratic Sens. Tom Harkin of Iowa and Elizabeth Warren of Massachusetts are proposing legislation to increase Social Security payments across the board.
Both senators are also pushing the need for a new government-run retirement savings plan based on CPS under-reporting of American participation in retirement plans. CPS figures claim that only half of Americans are offered retirement plans by their employers but the authors of the WSJ article cite a 2011 Social Security study indicating that 72 percent of all workers were offered retirement plans by their employer, and that the number increased to 84 percent for firms with more than 100 employees.
I am afraid that the president’s claim of increasing income inequality in this country will be based on equally flawed figures that he and others will use to advance their own political agenda. What could be more popular issue in this year’s congressional elections than an increase in Social Security benefits?
Frank DeStefano of Fairfield is a retired financial adviser.