The Social Safety Net for the Elderly

Kathleen McGarryUniversity of California, Los Angeles

and NBER

Prepared for “The Legacy of the War on Poverty: A 50-Year Retrospective” June 12-13, 2012, Ann Arbor, MI

Situation for the Elderly Differs

• Poverty rates for the elderly were abysmal, far worse than those for the non-elderly.

• In 1959:▫ Poverty rate for the elderly was 35.2% ▫ Poverty rate for children was 27.2% ▫ Poverty rate for those ages 18-64 was 17%

Situation for the Elderly Differs

• Poverty rates for the elderly were abysmal, far worse than those for the non-elderly.

• In 1959:▫ Poverty rate for the elderly was 35.2% ▫ Poverty rate for children was 27.2% ▫ Poverty rate for those ages 18-64 was 17%

• Poverty rate in 2010: ▫ Poverty rate for the elderly was 9% ▫ Poverty rate for children was 22%▫ Poverty rate for those ages 18-64 was 13.7%

Programs Prior to 1964: Social Security

• Established 1935 and gradually expanded during the 1940s and 1950s.

• Progressive benefit formula ▫ Higher replacement rates for low income workers

• Terrific return on investment for earlier cohorts. ▫ Ida May Fuller paid $24.75 over 3 years, received

$22,888.92 in benefits by her death at age 100.• Annuity aspect protects oldest old • Benefits for spouses and survivors, thus

contributes to well-being of the non-elderly.

Programs Prior to 1964: OAA

• Old Age Assistance programs state run programs stemming back to 1920s. In 1935, 30 states had such programs

▫ Established precedent of assisting the elderly• Social Security Act of 1935 provided matching

funds to states to expand these programs.• Benefits were low and varied greatly across

states▫ In 1960 $40 Mississippi to $275 Washington State

($306 and $2,108 in 2010 $) ▫ Variation in restrictions on benefits

lien laws, residency requirement, relative responsibility

Programs Prior to 1964: OAA (cont’d)

• Despite problems with programs, in 1950 more individuals receiving OAA than Social Security (2.8 vs. 2.1 million)

• Those receiving OAA still had very low income

▫ Median family income of OAA recipients in 1973 was $1,851 ($9,091 in 2010 dollars)

The War On Poverty and the Elderly• Central component is the Older Americans Act

▫ It was the responsibility of government to: “assist our older people to secure equal opportunity to the full and free enjoyment of the following objectives …adequate income in retirement,” … “suitable housing,” and “no discriminatory personnel practices because of age.”

• Established Administration on Aging• Demonstrated importance of the elderly• Set the stage for increases in Social Security

and for the establishment of SSI

Social Security and the War On Poverty

• In 1964 75% of elderly received Social Security• Average retired worker benefit $544.98

(2010$)• Run up in benefits:

▫ 1965: 7% increase▫ 1967: 13% increase▫ Johnson’s signing statement of 1967

amendments:

“This means that 9 million people will have risen above the poverty line since the

beginning of 1964”

Social Security and the War On Poverty• Increase in benefits continued after

Johnson: ▫ Tax Reform Act of 1969: 15% increase ▫ 1971: 10% increase▫ 1972: 20% increase

• Total of nearly 85 percent increase 1964—1972

• 1972 Amendments also indexed benefits

▫ Protected elderly against erosion of benefits over time.

SSI and the War On Poverty

• Replaced state run OAA programs with uniform federal guaranteed income program for elderly

▫ Administered by Social Security Administration▫ Part of Nixon’s Family Assistance Plan

• Began paying benefits in 1974 with guarantees of $140 and $210/mo ($698, $1,048 currently)

• Benefit = Guarantee – Countable income▫ Countable income=income – (first $60 earned+ ½

remainder, first $20 unearned) • Asset test initially $1500/$2250, now $2000/3000

SSI and the War On Poverty (continued)▫ Income disregards unchanged since 1972▫ Asset limits increased once but if increased

with the CPI would be $7,000 / $10,500 today• States can supplement federal guarantees

▫ 2011 all but 6 states had some supplemental program

Maximum is $1,039 / $1,539 in Alaska California is $830 / $,1407 Michigan is $688 / $1,039 Massachusetts is $803 / $1213

▫ Maximums are typically below the poverty line

SSI and the War On Poverty (continued)

• Those eligible are truly poor but participation in SSI is low, approximately 50-55%

▫ Measured in 1974, 1984, 1993 ▫ Why? Lack of knowledge, stigma, not feeling

needy▫ Numerous outreach efforts have been

unsuccessful Bounties, door to door canvasing, intensive

advertising, direct contact from Social Security• Alternative of minimum Social Security

benefit▫ Cannot be targeted at needy

Outcomes: Social Security

• Social Security played an important role in reducing poverty among the elderly

▫ Engelhardt and Gruber estimate it is responsible for the entire decline

▫ Indexation of benefits important for continued success and for the difference in the recent experience of elderly and non-elderly

Outcomes: SSI

• SSI also played an important role for low income elderly

▫ 26 states had OAA benefits below federal guarantee

e.g. Mississippi at $75 (federal guarantee $140)▫ Median income of OAA recipients rose by 1/3

with transition to SSI ▫ And 2.8 million individuals became newly

eligible. ▫ Estimate of 20% reduction in poverty (2.5

percentage points)▫ Estimate of 30%+ reduction in poverty gap

Still remain substantial problems

• Differences by race and ethnicity:▫ Rate for elderly blacks fell from 62.5% in

1965 to 21.9% now▫ But rate for elderly whites now is 7.7% ▫ Poverty rate for elderly Hispanics is 18%

Still remain substantial problems

• Differences by race and ethnicity:▫ Rate for elderly blacks fell from 62.5% in

1965 to 21.9% now▫ But rate for elderly whites now is 7.7% ▫ Poverty rate for elderly Hispanics is 18%

• Poverty rate for elderly women living alone:

▫ Fell from 63.3% in 1959 to 19.1% now▫ Large racial / ethnic differences. In 1999:

Black women living alone 44% Hispanic women living alone 58%

Changes in composition of income

Redistribution

• Progressive benefit schedule• Regressive tax structure• Other regressive components

▫ Transfers from short lived to long lived▫ Transfers from singles and dual earner

couples to one earner couples

Unmeasured Resources / Expenses

• Resources omitted from poverty calculations

▫ In-kind transfers: Medicare / Medicaid, Food stamps, LIHEAP, Housing assistance

▫ Value of Owner occupied homes▫ Assets have increased over time▫ Leisure time ▫ Home production

• Costs▫ Medical expenses ▫ Limitations regarding home production

Home ownership 2010 by age

Median net worth by age

Other Gains / Changes

• Living Arrangements ▫ Greater independence

In 1940, 18% of elderly widows lived alone In 1960, 36% lived alone (40% with children) In 1990, 62% lived alone (20% with children)

▫ Changes obscures improvements in poverty

Other Gains / Changes

• Living Arrangements ▫ Greater independence

In 1940, 18% of elderly widows lived alone In 1960, 36% lived alone (40% with children) In 1990, 62% lived alone (20% with children)

▫ Changes obscures improvements in poverty• Trend towards early retirement

▫ Feasible with Social Security increases▫ In 1960 lfpr men 65+ was 33.1 %▫ In 1990 lfpr men 65+ was 16.3 % ▫ (Has risen since)

Labor Force Participation Men 65+

10

15

20

25

30

35

40

45

50

1950 1960 1970 1980 1990 2000 2010

Other Gains / Changes

• Living Arrangements ▫ Greater independence ▫ Changes obscures improvements in poverty

• Trend towards early retirement▫ Feasible with Social Security increases▫ In 1960 lfpr men 65+ was 33.1 %▫ In 1990 lfpr men 65+ was 16.3 % ▫ (Has risen since)

• Life expectancy▫ In 1960 life expectancy at 65 was 14.3 yrs▫ In 2007 life expectancy at was 18.6 yrs

Life expectancy at age 65

Future

• Shift to defined contribution (DC) pensions and away from defined benefit plans

▫ Elderly will need to manage their resources

▫ Exposure to risk in financial markets, fraud • Changes in Social Security and Medicare

▫ Likely declines in real value of benefits• Possibility of needing long term care

▫ Not covered by Medicare▫ Average $80,000+ per year▫ Fewer children

Future

• Policies to encourage savings through private pension plans and survivor benefits

▫ Default options (Choi, Laibson, Madrian)▫ REACT, ERISA (survivor benefits)▫ Newer tax advantages savings plans

• Health improvements allow for longer work life and trend towards early retirement is reversing

• CLASS Act and tax advantage LTC plans