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PPI | Policy Report | November 1, 1998
The Economic Status of the Elderly on the Eve of Social Security Reform
By Timothy Smeeding and James Smith
The full text of this report is available in Adobe PDF format. Click "Full_Report.pdf" under the red File Attachments header on the right.
This paper is designed to present a baseline summary
of the economic status of the aged in the United States
as a prelude to Social Security reform.
We review the elements of economic and social
well-being of the present United States aged:
wealth, health status, and income levels and
sources (including Social Security). We also speculate
briefly on the future trends in each of these
elements, realizing that Social Security will play a
lesser role in the future. We pay attention to the
large differences in economic well-being between
the rich and poor; minorities and majorities; and
men and women. And we include a brief section
on cross-national comparisons.
Among our most salient findings, we conclude
the following:
Over the past four decades, the economic status
of the aged has improved considerably and
their poverty rates have been cut by two-thirds,
from 35 percent to 11 percent. Still, minorities
and older women living alone have poverty
rates in excess of 20 percent. Moreover, a much
larger fraction of the aged than of the non-aged
live right above poverty (between 100 and 125
percent of the poverty line).
The average economic status of the aged differs
sharply depending on marital status, minority
status, and age. Widowhood poses a significant
economic threat to most older women.
Around any average level of economic well-being
we find vast differences between those at the
top and the bottom of the economic spectrum,
with even larger differences among the elderly
than among the non-elderly. the three-legged
stool of Social Security, asset income, and pensions
works well only among the top 20 percent
of the aged. the bottom 20 percent rely on Social
Security for over 80 percent of their income.
Inequality in wealth holdings is much greater
among the aged than are inequalities in income.
Many older households have extremely modest
levels of accumulated savings, especially financial
assets. For example, the median older (aged
70 and older) household has less than $6,500
in financial assets, enough to get by for less than
half a year. Health status is also highly unequal
and is correlated positively with economic status.
A measure of well-being that takes account
of all of these factors would show greater inequality
than one based on income alone.
Wealth inequality among the elderly is largely
the consequence of past savings decisions. In
addition to income, savings are influenced by
past health shocks, a desire to leave bequests to
one's heirs, and disincentives to private savings
provided by asset-tested transfer programs. Social
Security also provides disincentives to save
among low-income households since replacement rates for these households from Social Security
are quite high.
Social Security benefits are progressive in that
they provide relatively higher returns to low-wage
earners (versus high-wage earners) in any
single year. they are the major form of wealth
holding for the lowest half of the overall wealth
distribution. Among blacks, Social Security
wealth exceeds other forms of wealth up to the
90th percentile of wealth distribution.
The Social Security benefits scheme also favors
married couples, particularly those where only
one spouse has worked. In short, the system
pays out more than it should when both spouses
are alive. But upon the death of one spouse,
the program pays out too little, helping produce
high poverty rates in old age for survivors. the
current system of Social Security also contains
large redistributions across generations, in this
case to the benefit of the current generation of
recipients and at a significant cost to all future
generations.
Comparisons with other nations indicate that the
United States faces a fairly modest degree of future
Social Security policy adjustment compared
to that required by many other nations. the question
to be asked is whether or not we can make
these changes while maintaining or even improving
the program's positive impact on poverty.
We conclude that the legs of the retirement income
stool are increasingly unequal. Social Security
or Old Age and Survivors Insurance (OASI) plays a
very important role in the incomes of many current
and future elderly. For a large number of well-to-do
Americans, Social Security will become an increasingly
smaller source of their economic well-being in
old age. On the other hand, restructuring the pay-as-
you-go OASI system may further compromise its
ability to provide a decent standard of living to the
low-income elderly. The poor who currently are on
the program and older women, particularly survivors,
are especially vulnerable. If baby boomers continue
to save at lower overall rates than did their predecessors,
economic inequality in old age may be even
further exacerbated in the future. It will therefore
be important to assess the impact of Social Security
reform on economic inequality to increase retirement
savings among lower income families.
To further insure against old-age poverty and
poor health status, the Social Security system needs
a solid lower tier of benefits. At the same time, we
need to further strengthen incentives to save and
to keep on saving, particularly among lower- and
middle -income households, so that they may enjoy
a solid three-legged stool of pensions, savings,
and OASI in old age.
Timothy M. Smeeding, Ph.D. is Professor of Economics and Public Administration at the Maxwell School of Citizenship & Public Affairs, Syracuse University, and is the founding Director of the Center for Policy Research. James P. Smith holds the RAND Chair in Labor Markets and Demographic Studies and was the director of RAND's Labor and Population Studies Program from 1977-1994.
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