Comparing the Current Population Survey to Income Tax Data

Abstract

This paper compares measures of 2010 annual income from the Current Population Survey (CPS) with those derived from IRS Statistics of Income Division (SOI) administrative tax data and finds that the CPS vastly understates the income of the elderly. We focus on four types of income found to be accurately reported on income tax returns and which represent the vast majority of income for most Americans: wages and salaries, Social Security benefits, retirement income (distributions from pensions, annuities, and IRAs) and investment income (taxable interest, tax-exempt interest, and dividends). The CPS appears to accurately measure wage and salary and Social Security income, but it misses more than half of retirement income and more than one-third of investment income. Differences exist regardless of age and, within age groups, persist even after accounting for nonfilers and controlling for other income. These differences translate into larger differences in more comprehensive measures of income—in both amount and composition—for older individuals, who get a much larger share of their income from retirement and investment income. Despite the fact that nearly one-in-four individuals age 70 or older do not file a tax return, aggregate income is nearly one-third higher in the SOI. The tax data also show that, as a group, individuals age 70 or older get more income from pensions, annuities, and IRAs than they get in Social Security benefits. The tax data only allow us to definitively identify two broad categories of retirement income: IRA distributions and income from pensions and annuities. Combining SOI-derived estimates with aggregated plan-level data on pension distributions, we estimate that traditional private-sector DB pension plans accounted for, at most, 19 percent of pension and annuity income in 2010—or about 14 percent of all retirement income, inclusive of IRA distributions. Government employee DB pensions accounted for a much larger share: up to 45 percent of pension and annuity income—or nearly one-third of all retirement income.

JEL Classification: H24, H55, J26, J32