The approaching retirement of the baby boom generation
has focused attention across all segments of society on issues related
to retirement and succession planning. Government policies that
can influence this planning and affect retirement income are of
increased interest to policymakers. Recent tax initiatives have
provided greater incentives for individuals to save for retirement.
The Administration has announced that social security reform is
among its highest priorities during 2005.
Retirement and succession planning are of considerable
importance to farm households and there are good reasons to believe
that they are affected by savings and retirement policies in ways
that are different from the rest of the Nation’s households.
For example, compared with the U.S. labor force, farm operators
are considerably older. Over one-fourth of all farmers, and about
half of all agricultural landlords, are age 65 or older, compared
with only about 3 percent of the overall labor force. Older age-group
farm operators and landowners control over one-third of all farm
assets and are staying in farming longer than previous generations.
Improved health and longevity, combined with technological advances
in farming equipment, enable farmers to continue to perform the
physical tasks necessary to operate a farm much longer than was
true for previous generations. Farming is also becoming popular
as a part-time retirement activity.
In addition to working longer past traditional retirement
age, farm operator households tend to have several income sources
and different forms of wealth, as compared with the general population.
Furthermore, because of the nature of the farm business, farm households
have different savings habits and more diverse financial portfolios
than most other U.S. households. Farm households’ financial
portfolios include more personal savings than those of the typical
U.S. household and, in general, farm households are also less dependent
on social security income during retirement.
Social Security Faces Potential Funding
Social security is considered the foundation of
the Nation’s retirement income system and is important to
the economic well-being of a large portion of the retired population.
Social security operates on a pay-as-you-go basis, with current
payroll taxes paying for the benefits of current retirees (see “Farmers’
Participation in Social Security Varies”). In recent years,
payroll taxes collected have exceeded benefits paid out. The excess
is invested in Treasury securities held in a trust fund to pay future
benefits. Over time, however, as baby boomers swell the retirement
ranks, benefit obligations are projected to exceed payroll taxes,
and trust fund assets could be drawn down and eventually exhausted
unless changes are made to the current tax or benefit structure.
The 2004 Annual Report of the Board of Trustees of the Federal
Old-Age and Survivors Insurance and Disability Insurance Trust Funds,
issued in March 2004, states that the trust fund reserves will be
exhausted in 2042.
Various incremental program changes have been suggested
for addressing potential long-term social security funding shortfalls.
These include increasing revenue by removing the cap on taxable
earnings subject to the old-age portion of the tax, reducing benefits
by indexing past annual earnings with changes in prices rather than
wages, or increasing the retirement age to reflect the fact that
individuals are living longer. The Administration has also proposed
a new feature: the creation of personal investment accounts into
which individuals would be permitted to divert a portion of their
current payroll taxes.
Participation in Social Security Varies
Social security is financed
through payroll taxes paid by employers and their employees,
as well as by self-employed individuals. Because farmers
often earn income from a variety of farm and off-farm
activities, their participation in social security varies.
Currently, 12.4 percent of an employee’s earnings
up to $90,000 is paid in payroll taxes by the employee
and employer (6.2 percent by each) to finance the social
security system. An additional 1.45 percent is paid
by both the employee and the employer to finance the
Medicare, or hospital insurance, system. In 1999, farm
operator households paid about $10 billion in social
security taxes (considering both the employer and employee
shares) on wages and salaries, primarily from off-farm
Like other self-employed individuals, farmers are subject
to the self-employment tax. The self-employment tax
is essentially equivalent to the social security and
Medicare taxes paid by employees and matched by the
employer. The self-employment tax rate is 15.3 percent,
consisting of two parts: 12.4 percent for social security
(old-age, survivors, and disability insurance) and 2.9
percent for Medicare (hospital insurance). Farmers paid
about $2 billion in self-employment taxes on farm and
nonfarm self-employment income in 1999.
Participation in social security also varies by type
of farm. For example, rural residence farm households
participate in the social security system primarily
through their off-farm employment and off-farm business
ownership. Since many of these farm households report
losses from farming, they pay little or no self-employment
tax on farm income. On the other hand, intermediate
and commercial farm operators are less likely to participate
in the social security program through an off-farm job
but instead contribute to social security through the
self-employment tax on farm earnings.
In addition to social security, the retirement income
system generally includes employer-sponsored pensions and personal
savings. Only about half of the U.S. workforce is covered by private
pensions, and the trend is away from pensions that provide a defined
benefit to those that provide a benefit that depends upon employee
contributions and earnings. In addition, many Americans have little
or no private savings. In fact, social security benefits account
for more than half of total income for over 60 percent of current
social security recipients and are the sole source of income for
about 20 percent of all recipients. In contrast, only about a third
of farm operators currently collecting benefits receive more than
half their income from social security. Among farm operators receiving
social security benefits, on average, social security accounts for
only about 13 percent of total income. Farm operator households
that receive social security benefits also receive significant amounts
of income from the farm, as well as from pensions, investment earnings,
and income from the sale of both farm and nonfarm assets. The average
annual social security benefit received by farm households in 1999
was about $12,300, slightly less than the $13,000 average for all
Farmers Earn Income From a Variety of Sources
. . .
Farm households earn income from both farm and off-farm
sources. Off-farm income, which accounts for 90 percent of total
farm household income, comprises income from off-farm businesses,
wages and salaries, interest and dividends, and other sources, such
as pensions, annuities, military retirement, unemployment, social
security, veterans’ benefits, other public retirement and
public assistance programs, and rental income from nonfarm properties.
In 2003, the average income for farm households, at $66,000, exceeded
that of nonfarm households, at $59,100.
Among all farm households, those headed by operators
age 55-64 have the highest income ($76,500). Farm operator households
headed by operators age 65 or older receive $18,400, or about 38
percent of total household income, from disability insurance, social
security, and other income sources (such as military and veterans’
benefits, other public retirement and public assistance). However,
among all U.S. households headed by persons age 65 or older, over
60 percent of total income ($30,400 in 2003) came from these sources.
. . .and Income and Wealth Vary by Age and Farm
The composition of farm
households’ sources of income varies with farm type. Rural
residence farms (where the operator reports being retired or a primary
occupation other than farming and gross farm sales are less than
$100,000) and intermediate farms (operator reports farming as the
major occupation and gross farm sales are less than $250,000) are
more dependent on off-farm income than commercial farms (family-operated
farms with gross sales in excess of $250,000). On the other hand,
commercial farm operator households receive most—80 percent
or more—of their income from farming. Commercial farm households
tend to operate large farms, produce commodities that are covered
under government programs (such as wheat, corn, cotton, and soybeans),
and receive a larger share of government commodity program payments.
Household wealth may be acquired through savings, inheritance,
or appreciation of household assets. Farm household net worth is
measured by the value of combined farm and nonfarm assets (minus
debt). Farm household assets are dominated by farm real estate (77
percent), while other physical assets (e.g., off-farm business investments,
nonfarm real estate, off-farm houses, recreational vehicles) represent
the biggest share of nonfarm assets (33 percent). Farm net worth
tends to increase with the age of the operator. For example, the
average net worth from farm assets increases from $251,800 for operators
under age 35 to $580,000 for those age 65 and older. Similarly,
the average net worth from nonfarm assets increases with age of
the farm operator, but only up to age 64 ($287,700). It then declines
as farm households liquidate assets to support consumption in older
ages (65 or older, $202,600). The share of farm net worth to total
farm household net worth varies with farm type. On average, farm
net worth represents 61 percent of wealth for rural residence farm
households, compared with 80 percent for intermediate, and 84 percent
for commercial farm households.
On average, farm households have substantially higher
wealth ($590,900) than all U.S. households ($359,400), but less
than half that of all U.S. self-employed households ($1,258,000),
with farm net worth contributing 70 percent of total farm household
wealth. Farm household wealth also differs in composition from that
of all U.S. households. The portfolio of assets held by farm households
is heavily weighted toward farm business assets, while the largest
shares among asset portfolios of all U.S. households are primary
residences, stocks, and mutual funds.
Retiring farm operator households have substantial wealth
as well. For example, the average net worth of farm operators who
indicate that they will retire in the next 5 years is about $45,000
more than the average for all farm households. However, a large
share of their wealth is in farm assets: average nonfarm net worth
of those planning to retire is less than half the average for all
farm households ($93,000).
Farm Households Save and Invest for Retirement
More than 50 percent of farm households regularly target
current income not used for consumption toward savings and other
investment opportunities both on and off the farm. Additionally,
57 percent of farm families reported in 2003 that they are saving
for long-term goals, such as retirement, education, or investment
in financial markets. Such savings can also finance unexpected future
needs, such as financial shortfalls in the farm business, or unexpected
health care expenditures.
Farm households, like nonfarm households, have diverse
financial portfolios, including assets not part of the farm business.
One-fourth of the nonfarm assets are retirement savings accounts.
Cash, checking, money market accounts, bonds, and certificates of
deposit constitute less than one-fourth of nonfarm assets, as do
stocks and mutual funds. The rest of nonfarm assets are held in
real estate and businesses aside from the farm, off-farm houses,
recreational vehicles, and other assets.
U.S. household retirement savings include both employer-sponsored
retirement plans and individual retirement savings plans, such as
IRA, 401(k), and Keogh accounts. Only 40 percent of farm households
participate in some type of retirement account, compared with 60
percent of all U.S. households. Commercial farm operators are less
likely to have an employer-sponsored pension and more likely to
receive a larger share of their retirement income from farm assets.
Participation rates in retirement savings accounts increase with
both income and net worth. Participation is also more likely among
families headed by persons under age 65.
legislation has attempted to stimulate increased retirement
savings. The Economic Growth and Tax Relief Reconciliation Act of
2001 increased the contribution limits for IRA and 401(k) accounts
and allowed “catch-up” contributions from workers age
50 and over. While most U.S. taxpayers are eligible to contribute
to an IRA, only about 3 percent of all taxpayers actually contribute.
The rate for farmers is slightly higher, at about 7 percent. While
many households not contributing to an IRA may participate in employer-sponsored
retirement plans, many have neither an employer-sponsored plan nor
an individual retirement arrangement.
According to data from the 1999 Agricultural
Resource Management Survey and 2001 data from the Survey of
Consumer Finances, the median values of retirement savings of farm
households ($12,500) are larger than those of self-employed nonfarm
households ($9,300) and are substantially larger than the median
retirement savings of all U.S. households ($300).
The retirement savings pattern for farm households varies
with income class, age of the farm operator, net worth, and income
from the farm business. The majority of farm households earning
$25,000 or more have retirement savings. Farm households with incomes
of $100,000 or more have only half as much in retirement savings
as self-employed nonfarm households with incomes of $100,000 or
more. A similar pattern is observed for variations in net worth.
Farm households at lower levels of net worth have more retirement
savings than all other U.S. households but have a smaller value
in retirement savings at the higher levels of net worth.
Retirement savings of farm, self-employed,
and all nonfarm households,
by selected characteristics1
_____________________________________________________________________________ Median value of holdings (dollars)
Retirement savings include IRAs, Keogh plan, 401(k). 2 This represents the lowest quartile
of farm households based on the total value of their
Source: 1999 Agricultural Resource Management
Survey, USDA, for farm households, and 2001 Survey
of Consumer Finances, Federal Reserve Board, for
Farmers Approaching Retirement Hold Onto Land
Retired and retiring farm operators account for over
a fourth of the principal operators of U.S. farm businesses. Their
succession decisions and retirement plans are of considerable importance
to the farming community and the future structure of agriculture.
Continuity of the family farm and the family farm sector is highly
dependent on successful intergenerational transfer following the
retirement of a farm operator. Intergenerational succession is especially
pertinent for farmers who are planning to retire within the next
5 years. Of those operators planning to retire from farming, the
average age is 62.
In contemplating retirement from farming, farm households
must consider the future of the farm. Tax laws may encourage older
farmers to hold onto their land and rent it out for retirement income.
Despite reduced tax rates on capital gains associated with the appreciation
in farmland values, the prospect of avoiding capital gains taxes
on any appreciation prior to death continues to encourage farmland
owners to hold the land. Recent changes in Federal estate tax policies
that allow larger amounts of property to be transferred at death
free of any estate tax further reinforce this incentive. Among farm
operators who plan to retire from farming in the next 5 years, about
a fifth report that they plan to rent out the farm, and another
fifth plan to sell the farm. The remaining operators plan to turn
over operations to others or convert their land to other uses. A
substantial portion of the 87 million acres owned by the 42 percent
of operators planning to either rent or sell their land will likely
become available in farmland markets in the next few years.
Farmers Are Ready for Retirement
Farmers, like other employees and business owners, participate
in and are eligible for benefits under the social security system.
The levels of benefits to farm households are only slightly less
than those for all other U.S. households. In addition, since many
farmers remain active in farming well beyond retirement age, older
farmers have income from a wide variety of sources and, as a result,
fewer are dependent primarily upon social security for their financial
While fewer farm operators are covered by employer-sponsored
pensions than are nonfarmers, a majority of farm operators save
from current income on a regular basis and have accumulated diversified
financial portfolios, including individual retirement savings. This
is especially true for lower net worth farm households that have
saved more than lower net worth nonfarm households. While higher
net worth farm households have accumulated less retirement savings
than all U.S. households, as a group these farm operators have accumulated
substantial business equity that can be a potential source of retirement
income to supplement social security and retirement savings.