The Social Safety Net for the Elderly

Kathleen McGarryUniversity of California, Los Angeles

and NBER

Prepared for the preconference “The Legacy of the War on Poverty: A 50-Year Retrospective” November 18, 2011, Ann Arbor, MI

Situation for the Elderly Differs

• Poverty rates for the elderly started well above non-elderly. In 1966:

▫ Rate for elderly was 28.5 % ▫ Rate for children was 17.6 % ▫ Rate for ages 18-64 was 10.5 %

• But since that time have fallen well below. In 2010:

▫ Rate for elderly was 9%▫ Rate for children was 22% ▫ Rate for ages 18-64 was 13.7%

Still remain substantial problems

• Differences by race:▫ White elderly poverty rate is 7.7%▫ Black elderly poverty rate is 21.9%

(Rate for blacks was 62.5% in 1965)▫ Hispanic elderly poverty rate is 18%

Still remain substantial problems

• Poverty rate for unmarried elderly women (and men) is substantially higher than couples

▫ Women living alone 63.3% in 1959, 19.1% now

▫ Men living alone 59% in 1959, 12.95% now

▫ Individuals in families now 5.6% Pension Reform: REACT, ERISA Medical spending for diseased spouse Longevity

Public Programs for the Elderly

• Medicare▫ Social Security Act of 1965

• Social Security▫ Social Security Act of 1935▫ Social Security Amendments of 1972 lead

to substantial increases in benefits Across the board increases (20%) COLA increases automated Changes in earning test Age 62 benefits

▫ 1983 Amendments Financing

Average Soc Sec Benefit over time

Supplement Security Income

• Federally funded means tested transfer program• Replaced state run programs of OAA, AB, APTD• Legislation passed in 1972, effective in 1974 • ** Guaranteed minimum monthly income

▫ In 2010 guarantees: $674 individual, $1011 couple▫ NOTE: Guarantees are below the poverty line

Single $871.5, Couple $1098 ▫ Asset test: $2000 individual, $3000 couple

Limits have not changed since inception Excludes home, furnishings, other minimal assets

Supplemental Security Income

• States can supplement federal levels▫ 44 States provide some optional supplementation

• Many have guarantees above the poverty line▫ Below poverty line for singles in nearly all states

and for couples in about 30 states▫ Half of elderly recipients have incomes below

poverty line• But has done much to reduce poverty gap

▫ Poverty gap falls by 71% with inclusion of SSI▫ SSI constitutes 90% of income for 35% of elderly

recipients and more than half of income for 46%

Supplemental Security Income

• Other income for SSI aged recipients: ▫ 56 % have Social Security income▫ Average benefit of $482▫ 1.4 % have earnings ▫ 16.6 % have other unearned income

• SSI roles are dominated by unmarried women with low education levels

▫ Largest portion now is DI• Non-participation remains a problem

▫ ~55% since beginning of the survey▫ Reduces potential to alleviate poverty

Other Programs benefiting elderly

• In-kind benefits▫ Food stamps / SNAP▫ Home energy assistance▫ Housing assistance

Non-monetary Gains are missed• Although there have been tremendous

improvements in poverty / income in focusing on these monetary measures we miss many of the improvements

• Life expectancy at age 65 has increased▫ In 1960 life expectancy at 65 was 14.3

years▫ In 2007 life expectancy at was 18.6

years

Life expectancy at age 65

Non-monetary Gains are Missed• Life expectancy at age 65 has increased

▫ In 1960 life expectancy at 65 was 14.3 years

▫ In 2007 life expectancy at was 18.6 years

• Probability of surviving to 65 increased▫ In 1960 60% of men and 71% of women

survived from 21 to 65▫ In 1990 72% of men and 84% of women

survived to age 65.

Fraction surviving age 21 to age 65

Non-monetary Gains are Missed

• Independent living has increased▫ Fraction of elderly widows living alone

increased: 18% in 1940 36% in 1960 62% in 1990

Non-monetary Gains are missed• Independent living has increased

▫ Fraction of elderly widows living alone increased from:

18% in 1940 36% in 1960 62% in 1990

• Earlier retirement▫ Average number of years in retirement is

18 (Trend towards early retirement has

reversed)▫ Should we expect same length of work

life to support substantially longer retirement?

Labor Force Participation Ages 55+

Issues for future work

I. Measurement of poverty / well-being•Alternative definitions are particularly relevant for the elderly

▫ Health care costs are much greater for the elderly

▫ But they also have a significant benefit from Medicare / Medicaid

Medicare spent $9800 per enrollee Medicaid spent $4650 per enrollee

Per capital health spending by age

Issues for future work

I. Measurement of poverty / well-being•Alternative definitions are particularly relevant •Treatment of wealth

▫ Expect individuals to consume wealth at older ages so income may be a poor measure

▫ Life cycle model predicts that elderly have greater wealth, difference has grown over time

•Greater home ownership rates ▫ Need implicit value of owner occupied home

Median net worth by age

Home ownership 2010 by age

Issues for future work

II. Changing economic environment•Rise in define contribution pensions

▫ Burden of managing finances falls on individuals

▫ Increases risk borne by elderly▫ Room for mistakes / fraud▫ Undeveloped annuity market

•Coming changes in Social Security / Medicare•Long term care risk

▫ Fewer children to provide care▫ Cost of nursing homes▫ Little insurance protection

Issues for future work

III. Role of Family•Changes in public support mean changes for family and visa versa •Family as insurer

▫ Does family provide annuities with switch to DC?

▫ Does family provide LTC insurance? ▫ Elderly now providing assistance to

children (boomerang children) Does this assistance affect their savings for

retirement and later well-being?

Issues for future work

III. Role of Family•Changes in family structure

▫ Fewer children as fertility declines▫ More women working

Have own pensions Unable to provide care for parent

▫ Step families / step children / partners Larger family network but potentially

weaker ties

Issues for future work

IV. Potential Ways to Improve Further•Raise SSI minimums to poverty line

▫ Remains means tested▫ Improve participation / outreach

•Raise minimum Social Security benefit▫ Not means tested

•Availability of better “insurance” products▫ Annuities for DC plans▫ Availability of LTC insurance