4
Income, Wealth, and Intergenerational Economic Relations of the Aged

Douglas Holtz-Eakin and Timothy M. Smeeding

INTRODUCTION

This chapter summarizes what is known about the economics of the aged. In doing so, our goals are to review the relevant literature and to identify valuable new directions for research into the economic status of the aged in the United States. Our discussion is organized around several themes:

  1. the wide diversity in economic status among the U.S. aged compared to the aged in other nations;

  2. the recent trends in the economic status of the aged and their sustainability in the foreseeable future;

  3. the role of intergenerational transfers in affecting the welfare of the aged; and

  4. the data needs for studying the aged, including the potential of the new Health and Retirement Survey (HRS) and Assets and Health Dynamics (AHEAD) survey, which are in their initial stages.

The authors are grateful to Linda Martin, Samuel Preston, Beth Soldo, and Robert Willis for useful comments; Debra Bailey, Deborah Milne, Inge O'Connor, and Michelle Harter for research assistance; and Karin D'Agostino and Esther Gray for their assistance in preparing the manuscript. Smeeding's work was supported in part by the National Institute on Aging program project grant #3-POI-AG09743-01 to Syracuse University.



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Demography of Aging 4 Income, Wealth, and Intergenerational Economic Relations of the Aged Douglas Holtz-Eakin and Timothy M. Smeeding INTRODUCTION This chapter summarizes what is known about the economics of the aged. In doing so, our goals are to review the relevant literature and to identify valuable new directions for research into the economic status of the aged in the United States. Our discussion is organized around several themes: the wide diversity in economic status among the U.S. aged compared to the aged in other nations; the recent trends in the economic status of the aged and their sustainability in the foreseeable future; the role of intergenerational transfers in affecting the welfare of the aged; and the data needs for studying the aged, including the potential of the new Health and Retirement Survey (HRS) and Assets and Health Dynamics (AHEAD) survey, which are in their initial stages. The authors are grateful to Linda Martin, Samuel Preston, Beth Soldo, and Robert Willis for useful comments; Debra Bailey, Deborah Milne, Inge O'Connor, and Michelle Harter for research assistance; and Karin D'Agostino and Esther Gray for their assistance in preparing the manuscript. Smeeding's work was supported in part by the National Institute on Aging program project grant #3-POI-AG09743-01 to Syracuse University.

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Demography of Aging Our discussion of several topics is limited by the constraints of space and data. In particular, housing choice and mobility, the separate identification of period or cohort effects on the economic status of the aged, and the baby boom's retirement prospects are given less space than their importance might suggest.1 Predicting the economic status of the aged at the turn of the century is, in our opinion, a speculative venture; forecasting the economic status of the aged well into the next century is even worse (Smeeding, 1991; Palmer, 1988). In fact, the data resources needed to make such judgments as these are just now beginning to be collected and analyzed. This chapter is divided into four substantive parts. The next three sections deal with income (and consumption) and poverty, wealth, and intergenerational economic relations, respectively. In the final section we turn to the implications of our results for additional research and data needs in this area. ECONOMIC WELL-BEING: INCOME, POVERTY, AND CONSUMPTION The purpose of this section is to review what we know about the economic circumstances of the old, with economic welfare largely measured by their incomes. Comparisons are made both over time and across countries regarding the poverty and affluence of the aged. In order to present these materials in a comprehensive way, we concentrate on income comparisons that provide the single best widely available measure of economic status at a point in time or over time. Other valid and important measures of economic status, such as consumption, are discussed. Our treatment is, however, more circumscribed because of space and data limitations. There are a variety of income concepts available to applied researchers, but economists have traditionally relied on disposable personal income as the most important indicator of economic well-being for an individual. Cross-sectional, survey-based money income data are regularly available to researchers. Less readily available, but increasingly useful, are longitudinal "panel" microdata sets that permit researchers to follow individuals and their changing economic circumstances over time. In the United States, the leading examples of the latter are the Michigan Panel Study of Income Dynamics (PSID) and the National Longitudinal Survey (NLS). Data from the Luxembourg Income Study (LIS) project allow for cross-sectional comparisons among several industrial democracies at two points in time (early 1   For instance, the choice of housing and living arrangements among elderly widows has important interactions with economic circumstances and measured well-being; see Macunovich et al. (1992).

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Demography of Aging and middle 1980s). More recent is a project that combines the PSID with the German Socio-Economic Panel (GSOEP), permitting for the first time cross-national comparisons of panel data. Although money income is a useful measure of economic well-being, it serves largely as a proxy for the variable of ultimate interest: final consumption. To convert income estimates into consumption estimates, we need to take account of three factors. First, economic responsibilities and needs can vary substantially among families, depending on their characteristics, particularly the number and age of family members. Second, many resources of considerable economic value—for example, home ownership and medical insurance—affect consumption but not money income. Thus, two families with similar money incomes could, in fact, have very different levels of economic well-being, and two families that might generally be judged as having a similar level of economic well-being might have very different levels of money income. Third, current income may rise above or fall below long-run, or permanent, income. Savings or transfers may cushion consumption from these shocks and weaken the relationship between current income and current consumption. The first two of these limitations can be overcome at least in part by trying to estimate the income value of nonmoney economic resources and by adjusting measures of income to reflect differences in needs by using adult "equivalence scales." The adjustment is made by dividing the income of a given size and age unit by the relative number of equivalent adults, normalized, for example, to a family of size three. Changes in U.S. Means and Medians The increased well-being of the elderly as a group over the past 20 years is now a well-documented fact. In 1991, the median income of households with a head aged 65 and older before taxes was $16,975—a gain of more than 40 percent in the purchasing power of this group since 19712 (Bureau of the Census, 1992a:Table B-4). Moreover, the 1991 median income was more than twice the level of the poverty threshold for an elderly couple ($8,241) (Bureau of the Census, 1992c). Since 1980, the elderly have experienced both a faster increase in average money income and a faster reduction of official (income-based) poverty 2   Unless otherwise stated, all measures are deflated using the Consumer Price Index, Urban Consumers (CPI-Uxl) price index. The terms household and family are used separately here. A household includes all persons sharing the same arrangements whether related or not. A "family" is all persons living together and related by blood, marriage, or adoption. The terms are used as prescribed by the data sources.

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Demography of Aging than have the nonelderly (Radner, 1987, 1992; Bureau of the Census, 1992a; Duncan and Smith, 1988; Hurd, 1990; Smolensky et al., 1988). In large part, the increased relative position of the elderly is due to the slow growth in incomes of working families, and to the automatic wage indexing of initial benefits and price indexing of existing benefits in the Old Age and Survivors Insurance Program (OASI). Most of this gain took place by 1985. By 1991, real median household money income was below the 1986 value for householders both over and under age 65, though it fell by more for the nonaged (2.7 percentage points) than for the aged (1.3 percentage points) (Bureau of the Census, 1992b). Income gain for the elderly relative to the nonelderly was not a phenomenon unique to the United States. In fact, it occurred to an equal or greater extent in Canada and the United Kingdom (Smeeding et al., 1993). A recent report (Bureau of the Census, 1992a) allows one to make comparisons between the elderly and the entire population using a broader definition of income. "Expanded" income is money income including capital gains, plus fringe benefits, in-kind transfers, and implicit rent, minus rent paid. Because the income distribution for both elderly and nonelderly is skewed, mean (or average) household income is higher than median household income. For instance, census cash income for all households with members age 65 or over had a mean value of $26,408 in 1991, but a median value of $18,183 (Bureau of Census, 1992a:Table 1, p. 51). Thus, medians allow us to compare the "middle" unit (family or household) in the distribution of the elderly to its counterpart among the nonelderly, whereas means measure the average position regardless of the shape of the distribution. Comparisons of income for the elderly to income for the entire population based on these data are presented in Table 4-1. They indicate that on an expanded income basis, by adjusting for differences in household size, the mean and median ratios of incomes of households with elders to incomes of all households are 1.05 and 1.02, respectively.3 In other words, on this basis, the elderly as a group are now as well off as are the nonelderly, as a group. One of the most comprehensive studies of trends in family incomes since 1970 was recently completed by the Congressional Budget Office (CBO, 1988). Using an equivalence adjusted family income (AFI) measure, CBO finds that median incomes for all families (and unrelated individuals) grew by about 20 percent over the 1970-1986 period. Although the CBO was unable to include taxes or income in kind in its computations, 4 the 3   Excluding the imputed return on home equity, these ratios are 0.99 and 0.95, respectively. See notes in Table 4-1 for a complete description of the income definitions. 4   The effects of taxes and in-kind transfers would be to increase the rate of growth of elder family median incomes relative to nonelderly family incomes over this period.

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Demography of Aging TABLE 4-1 Ratios of Incomes of the Elderly (households with persons 65 and over) to Incomes of All Households in 1979 and 1991   Unadjusted for Size of Household   Adjusted for Size of Householda   Income Concept 1979 1991 1979 1991 Ratios of means Money income before taxesb 0.64 0.70 0.77 0.85 Expanded incomec 0.73 0.81 0.86 0.99 Expanded income plus implicit rentsd 0.76 0.86 0.90 1.05 Ratios of medians Money income before taxesb 0.52 0.60 0.62 0.74 Expanded incomec 0.65 0.78 0.78 0.95 Expanded income plus implicit rentsd 0.72 0.83 0.86 1.02 a Adjusted incomes were computed by using the Census Bureau's poverty line equivalence scale to transform unadjusted income. The average household size for all families was 2.63 persons as compared to 1.65 for all households headed by a person 65 and over in 1991. In 1979, the values were 2.78 for all households and 1.88 for households headed by a person 65 or over. b Money income before taxes is the traditional Census Bureau's measure of income used to generate annual income and poverty statistics. c Expanded income adds realized capital gains, employer-provided fringe benefits in the form of health insurance, noncash transfers in the form of health insurance (Medicare, Medicaid), food stamps, and public housing. It also subtracts federal and state income taxes and payroll taxes. Medicare and Medicaid are measured at their fungible value (i.e., they are counted as income only to the extent that they free up resources over and above basic food and housing requirements that could have been spent on health care). See Bureau of the Census (1992a:B-1 to B-5, C-1 to C-4), for full explanation. d Expended income plus implicit rent adds a measure of the implicit rental income of owner occupiers via a rate of return (6.9% in 1991) applied to the net equity in owned homes. It also subtracts property taxes owed on these homes from the expanded income measure defined in c above. See Bureau of the Census (1992a:B-3, B-4) for full explanation. SOURCE: Based on data in Bureau of the Census (1992a). differences in income growth among various groups are striking. Elderly childless families (largely married couples) and unrelated individuals experienced large (nearly 50%) increases in real income. (The latter group started from a much lower base.) Much of the rapid growth in income among the elderly is directly attributable to increased OASI benefits. Among all retired Social Security recipients, on average, real benefits rose from $3,730 in 1970 to $5,856 in 1986, an increase of 57 percent (Congressional Budget Office, 1988). Families with children did less well, experiencing a 13 percent increase in incomes, with all of this increase taking place by 1979. Since then, real incomes have stagnated for this group. By 1986,

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Demography of Aging childless elderly families had AFIs that were substantially higher than those for families with children. Variation in Well-Being Despite these impressive gains on average, the key factor to be emphasized in investigations into the economic status of the elderly is their heterogeneity. Quinn (1987:64) captured the essence of this argument as well as anyone: ... never begin a sentence with "The elderly are ..." or "The elderly do ..." No matter what you are discussing, some are, and some are not; some do, and some do not. The most important characteristic of the aged is their diversity. The average can be very deceptive, because it ignores the tremendous dispersion around it. Beware of the mean. In particular, a major contributor to the rising average economic status for the elderly over time is the very fact that the group is changing. "New entrants" to the elderly group (those persons in households or families headed by a person just turning age 65) arrive with higher average income and wealth than persons leaving that group (those who die in any given year). For instance, comparing data from two Census Bureau surveys, the first taken in 1979 and the second in 1984, the average income and net worth of those families with heads aged 65-69 increased by 47.5 and 37.6 percent, respectively, over this 5-year period (Lamas and McNeill, 1985). On the other hand, the incomes and net worth of those families with heads 65 to 69 in 1979 who were aged 70 to 74 in 1984, increased by only 13.5 and 14.4 percent, respectively. Although this trend may someday change (Levy and Michel, 1991), over the past two decades, average household (or family) incomes increased at a faster rate for the elderly as a group than for a specific cohort of elderly household heads over time. Ross et al. (1987) indicate that between 1950 and 1980, successive cohorts of the elderly (families with heads age 65 or over) had increasingly higher ratios of unadjusted money income to needs at age 65.5 But their data also indicate a decrease in income relative to needs for each of these cohorts as it ages (Duncan and Smith, 1988). Using panel data from the PSID to follow a sample of elderly families from 1969 to 1987 (and beyond) indicates that the ratio of income to needs falls after retirement for elderly couples in general and for widows in particular (Burkhauser and Duncan, 1988, 1991). For instance, over the period 1969-1979, older per- 5   Needs are measured by the official poverty line for the correct age and family size group. Alternative needs adjustors (equivalence scales) might provide different results. See Buhmann et al. (1988).

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Demography of Aging sons who remained intact as married couples throughout the period experienced a drop of 23 percent in their ratio of money income to needs between 1 year prior to retirement and 2 years after retirement. The income-to-needs ratio for this same group fell by another 27 percent during the next 6 years, leaving the average retired couple just 50 percent as well off 8 years after retirement as they were 1 year prior to retirement. The situation is worse for female survivors (eventual widows) but not for male survivors (widowers) of retiring couples over this period: 7 to 8 years after retirement, a widow's income-to-needs ratio is only 40 percent as high as that of the preretirement couple. The lesson to be learned here is that when explaining trends in the economic status of the aged, it is important to differentiate across types of studies (panels, cross section), types of units (widows versus widowers versus couples), and age groupings (cohorts). Poverty Perhaps the most noteworthy accomplishment of the past 30 years is the large and sustained decrease in poverty among the U.S. elderly. Two useful points of comparison for the elderly in this context are the changing poverty status of children—the other major dependent group in society—and the poverty status of nonelderly adults. Figure 4-1 presents estimates of the percentage of persons defined as officially poor by the U.S. government. The figure indicates that poverty rates for elderly Americans have fallen, while those of children (as measured by the incomes of families with children) have increased since 1969. In fact, poverty rates of the elderly have been lower than those of children since 1974, and lower than the overall national rate since 1983 (Preston, 1984). For the past 8 years, poverty among the aged has moved in line with poverty among other groups. In 1991, elderly poverty was at 12.4 percent (up slightly from the 11.4% rate recorded in 1989 and less than half of the 1969 rate of 25.3%), while that of children was 21.8 percent (slightly below the 22.3% high of the 1969-1987 period, recorded in 1983, but one-third greater than the 13.8% rate of 1969). The poverty rate of the aged still exceeds that of nonaged adults by about 1 percentage point (see Figure 4-1 and Bureau of the Census, 1992c). A more detailed picture of poverty among the elderly reveals a diversity of poverty experiences across subgroups (Table 4-2). The overall poverty rates for the elderly shown in Figure 4-1 fail to capture the fact that among the elderly, poverty rates run from a low of 5.3 percent for elderly married males to a high of 21.4 percent for widowed females 65 and older (U.S. Congress, 1992:1240; Bureau of the Census, 1992c). They also do not convey the fact that the poverty rate for black and/or Hispanic aged (who are 20% of the aged today and will be a much higher fraction in the next century) is two to three times higher than that for non-Hispanic whites

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Demography of Aging Figure 4-1 Trends in official poverty rates among aged, nonaged adults, and children. SOURCE: Bureau of the Census (1992b:Table 2, 3). Official poverty rates for persons are derived from the before-tax money incomes of the families in which they reside. (the exact figure depends on the category selected; Taeuber, 1992). For instance in 1990, poverty among non-Hispanic white females age 65 and over was 13.3 percent, but 39.3 percent for black females and 24.5 percent for Hispanic females (Bureau of the Census, 1992c:Table 5). In the same way, elderly poverty rates vary by age. The data in Table 4-2 indicate the relationship between age and the poverty status of elderly persons. With the exception of widowed men, poverty rates among the elderly increase with age. Because elderly persons aged 85 and over are the fastest growing age group in the nation, and these persons are 62 percent female (Taeuber, 1992:Table 2-4), this pattern suggests some cause for concern. In any event, the considerable diversity in poverty experience among the elderly needs to be recognized by those who would draw policy implications from comparisons of overall poverty rates. In contrast to income-based measures of economic status, following specific persons in families over a 10-year or longer time period yields a similar picture for changes in poverty status (Burkhauser and Duncan, 1988, 1991; Burkhauser et al., 1991). For instance, 35-41 percent of elderly women were likely to be poor at least once between either 1969 and 1979 or 1983 and 1988 as compared to 20 percent of women age 25-45. This same body of research suggests that widowhood is a major source of economic

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Demography of Aging TABLE 4-2 Poverty Rates Among Subgroups of the Elderly in 1991 (in percent) Category of Elderly All 65+ 65-74 75-84 85+ Total 12.2 9.7 14.9 20.2 Males, total 7.6 6.4 9.3 12.6 Male, married 5.3 4.2 7.2 11.4 Male, widowed 13.8 13.2 14.3 13.9 Females, total 15.4 12.3 18.3 24.1 Female, married 5.7 4.7 8.1 NA Female, widowed 21.4 19.5 22.1 24.4 NOTE: Estimates show percentage of persons poor in each age group using the same official U.S. poverty measures employed in Figure 4-1; NA indicates that data is not available. SOURCE: U.S. Congress (1992). insecurity among aged women in the United States (Burkhauser and Duncan, 1991). In fact, using a longer-term measure of poverty, these researchers find that a higher proportion of aged women are liable to remain poor over several years than are any other age group in the population. Interestingly, the transition to widow status for women is much less well protected than is the equivalent transition to widowerhood for men. Although these panel data studies are quite suggestive, they are hampered to some extent by relatively small samples of the aged. Moving to broader measures of economic well-being, for instance, those used in Table 4-1 that include noncash income, capital gains, imputed rent, and other sources of income, we find lower overall poverty rates—both in absolute terms and relative to the overall poverty rate for the entire population—among the aged. For instance, among those 65 and over, poverty rates can be as low as 6.1 percent once imputed rent is taken into account. This contrasts with a comparable poverty rate of 10.3 percent for the population at large. Unfortunately there has been little substantive research into the consumption levels of the aged or on consumption-based measures of poverty and economic well-being. A notable exception is Cutler and Katz (1991). Owing particularly to the effect of imputed rent for owned housing or consumption, they find overall poverty rates among the aged in the 4-5 percent range in the 1980s, compared to 8-9 percent rates for the population at large (Cutler and Katz, 1991:Table 14, p. 48). But even when these income measures are used, poverty rates vary by sex, race, and age.

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Demography of Aging Near Poverty and Needs The measures of poverty status presented to this point have used various definitions of income, but all have relied on the official U.S. poverty definition in which the ''needs" of the aged (and nonaged) are measured by the Orshansky (1965) food multiplier technique developed 30 years ago. "Food times three" adjusted for age and family size differences results in poverty lines for the aged that are 8-10 percent below those of the nonaged and that exclude several important changes in the consumption bundle of the aged since that time (Ruggles, 1990, 1992; Quinn, 1992; U.S. General Accounting Office, 1992). Although little research has focused on this issue, the initial efforts (Ruggles, 1992; Ruggles and Moon, in press; Moon, 1992) indicate that health care expenses of the aged have changed drastically since the 1960s. For instance, the aged now spend a greater share of income on acute health expenses (15%) than they did before the advent of Medicare (11%; see Moon, 1992; Holden and Smeeding, 1990). Even among poor aged households—who are presumably protected by Medicaid as well as Medicare—acute health care expenses exceeded 20 percent of income in 1987 (U.S. General Accounting Office, 1992). The income value of home ownership to the aged is also open to some question. As we have seen, poverty rates among the aged fall by a third or more when one imputes as income the rental value of home equity (defined as market value minus mortgage owed). The Bureau of the Census (1992b) assigns a 5-6 percent return to the net asset value of owned homes to calculate imputed rent; Cutler and Katz (1991) employ a regression procedure to estimate the rental equivalences and use this value as a replacement for actual expenses on owned homes in their measure of consumption. Because 57 percent of poor, aged, single women are home owners, such an imputation produces a fairly large drop in the poverty rate of this critical group. On the other hand, the U.S. General Accounting Office (1992) calculates that one-half of U.S. aged home owners spend more than 45 percent of their incomes on property taxes, utilities, and home maintenance. Of these factors, the Census Bureau adjusts only for property taxes. 6 Neither study adjusts the poverty needs measure for any of these differences in income definitions. Greater examination of these issues should be a high priority for future research. Small differences in "needs" levels for the aged make a large difference in measures of poverty because many of the low-income aged were moved only a short distance beyond the poverty line by changes in average OASI 6   It is not clear exactly how Cutler and Katz treated property taxes, utilities, or home repairs. Different treatments could provide widely differing estimates of imputed values.

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Demography of Aging benefit levels and benefit increases over the past 20 years.7 Near poverty among the elderly (those between 100 and 125% of the poverty line) has decreased only slightly since 1970 as compared to the official poverty rate. Among elderly women householders (largely single women living alone) the percentage that is near poor has actually increased slightly (Bureau of the Census, 1992c:Table 6; Smeeding, 1990:Table 19.5). Because the low-income aged rely on Social Security for 70-79 percent of their incomes (Grad, 1992), the level and benefit structure of OASI is of particular importance to them. Interestingly, due to overall low benefit levels and related eligibility hurdles, the Supplemental Security Income (SSI) program—which is designed to help guarantee a minimum income for the aged—now makes up less than 9 percent of the income of the poor aged (U.S. Congress 1992:Table 10, p. 1244). In fact, disabled children under the age of 18 now receive more in annual SSI benefits than do the SSI aged (Social Security Administration, 1992). There is another important reason for additional research on measuring needs for single, aged individuals as opposed to aged couples. The Social Security (OASI) benefits of a retired couple are reduced when either the husband or the wife dies. The reduction depends on past earnings and retirement ages for each person. The reduction is usually 33 percent, but in the case of spouses each claiming their own benefits, it can be 50 percent. In contrast, the poverty line for an aged single person is only 20 percent less than the poverty line of an aged couple. Owing to the importance of OASI as an income source to low-income widows, a large decrease in OASI can mean a fall into poverty.8 Research to establish the "correct" equivalence scale is in its infancy but should be pursued vigorously (Hurd and Wise, 1991; Merz et al., 1992; Smolensky et al., 1988). International Comparisons Thanks to the research opportunities created by the Luxembourg Income Study and by the PSID-GSOEP comparable panel data project, we are able to compare the elderly and other population groups across countries. The data underlying these comparisons consist of national income survey data sets that have been made comparable by rearranging and reclassifying incomes. The LIS data we employ are for a range of years between 1979 7   Of course, these decisions are somewhat endogenous since public policies to increase OASI benefits were likely tailored precisely to accomplish this goal. 8   Smolensky et al. (1988) find that adopting the same equivalence scales for both poverty and OASI would reduce poverty rates among elderly single women by 22-33 percent. Hurd and Wise (1991) find that increasing survivors benefits by 20 percent would reduce poverty among aged older women from 39-20 percent in 1984.

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Demography of Aging average or the "percentage with" some asset or type of income. For instance, consider occupational pensions. Recent reductions in pension coverage (Bloom and Freeman, 1992; Goodfellow and Schieber, 1992) are not reflected in the projections reported in Reno (1992). Dynamic simulation models are programmed to play out a set of assumptions regarding wage growth, pension coverage, survivors benefits, etc., none of which may in fact turn out to be true and the sensitivity of which—if it is tested—is rarely reported. Moreover, the receipt of an occupational pension says nothing of its value or generosity now—or in the future. What we do know is that private pensions are at best partially indexed and that their distribution is highly skewed. Grad (1992) reports that occupational pensions from private firms or government retirement represented 20 percent or more of aggregate income only for those aged households in the top 40 percent of the income distribution. The bottom two quintiles of the aged ranked by household income received only 3.4 and 7.9 percent of their respective incomes from these sources. Pestieau (1992) finds a similar distribution across older households using the same LIS countries shown in Table 4-4. And so, we are quite reluctant to speculate about the future status of the aged given the large amount of missing information on such items as private pension receipt, pension adequacy, and the like. 28 Moreover, we realize that forecasts for the "elderly" as a group are rather hollow. At any point in time the "elderly" can be defined to include three or four groups of "retired" people who fall into four age ranges—the 55-64 year olds (near elderly by some accounts), 65-74 year olds (young aged), 75-84 year olds (transition years or ''middle-aged" elderly), and those 85 and over (the oldest-old). Each of these generations faced, is facing, and will face, distinctly different prospects as it ages. Further, each group will have had different life-cycle income experiences during key periods of its members' lives. Moreover, within each of these cohorts there is a highly skewed distribution of income and wealth. And last, but not least, recent research on cross-national comparisons of the aged indicates that the United States is at one extreme or another—both good (the highest income and wealth, younger aged couples) and bad (poor older women living alone)—in almost any comparison one can make. Recalling Quinn (1987), we are highly uncomfortable about saying much of anything specific about "the aged" of tomorrow. Statements such as "there will be poverty and affluence" or "women will do worse than men" seem rather empty for us. We would rather con- 28   Salisbury (1993) reports that up to $35 billion (out of a total of $125 billion) of yearly lump sum pension payouts for job changers—at least $35 billion and perhaps up to $80 billion a year—are not rolled over but are instead used for paying bills or for unmet consumption needs. The net effect of these decumulations has not been well charted by anyone at this time.

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Demography of Aging centrate our remaining space on what is needed to make meaningful comparisons, than to paint fuzzy pictures of the retirement years of the baby-boom generation. Data Gaps We anticipate that two new surveys, the HRS (health and retirement) and AHEAD (health, assets), will put us in a much stronger position to assess, explain, and forecast the economic status of the aged. Each of these panel data sets combines information on health, wealth, income, and related issues. The design of the health-wealth-income change linkages in these surveys reflects the input of researchers knowledgeable in the issues and data gaps, and what is (was) needed to fill them. Accordingly, many of the questions posed here will be addressed in the near future. Finally, because these are continuing panel data sets, new supplements to each survey will permit researchers to address fairly quickly and thoroughly many of the questions that are just beginning to emerge. Social scientists who work in other areas of the age distribution (e.g., children) will likely wish they were as lucky as are researchers in the area of aging. Neither survey, however, fills the major gap we find in studies of the aged: consumption. A fundamental flaw in the Bureau of Labor Statistics' annual Consumer Expenditure Survey (CEX) is its failure to balance consumption (C) and income (I) with change in net worth (ΔNW). Because of this incomplete linkage of flows into and out of the consumer unit, reporting errors and behavioral changes in C or I may be confused with ΔNW at several levels. Without ΔNW, we can only speculate on how people pay large medical bills, dissave, borrow, bequeath, and/or otherwise change assets. There are two solutions to this problem: either add direct consumption measures to HRS and AHEAD, or measure C as the residual to I - ΔNW. It seems to us that the latter strategy is the easiest way to go. On the international data front, progress is being made in two directions. The LIS project is moving both forward (new data sets with more recent data every 4-6 years) and backward (data for 1970-1980), and adding new countries at a rapid pace. Over the next 10 years, it should allow us to expand both our breadth and our depth of knowledge about the aged via cross-sectional and cohort studies. Moreover, a new project sponsored by the National Institute on Aging to make the PSID and GSOEP comparable, is for the first time allowing us to compare directly the impact of life events on changes in living standards among the aged. In the future, we expect that other nations' data sets will join these two to provide the basis for an even more rich tapestry of cross-national research in the economics of aging and retirement.

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Demography of Aging Knowledge Gaps While the data gaps are being filled, these new data are of use only to the extent that we can employ them to answer questions that interest us and are today unanswered. In general, this survey leads us to the following conclusions regarding knowledge gaps: There has been a greater research emphasis on income and income change than on wealth and wealth change (savings and dissavings). In particular, research on poverty or economic disadvantage has concentrated mainly on income and income change, with little emphasis on wealth and wealth change, or on needs assessment. At age 65, aged in the United States have the highest income and wealth in the world. After age 75, the United States has the highest fraction of low-income aged women living alone in the world. How do we go from one stage to the other? What is the role of health status, health care finance, and other factors in explaining moves from one state to the other? There has been very little research examining how economic needs (e.g., health care) among the aged affect household budgets, consumption needs, and wealth decumulation among the least well-to-do aged. Our understanding of the transfer of economic resources across generations must be strengthened. In the area of wealth transfer, we have literally touched only the tip of the iceberg. The most obvious step is to extend research into the motives for intergenerational transfers. In part, this exercise will be aided by survey data on the expectations of the aged such as those in the HRS, but additional steps would be useful. There is a clear need for treating transfers in a life-cycle context, although the data requirements are severe. Specifically, how does the expectation of making a transfer affect the consumption, housing, financial, and other decisions of the elderly? How does the expectation of receiving such a transfer affect the human capital accumulation and other decisions of the young? Such research would effectively permit one to understand how transfers affect income, not simply the reverse. A second area is the interaction between public and private transfers. There are strong reasons to expect that annuitization of the elderly through programs such as Social Security, and the interaction between the social safety net programs and asset accumulation, will affect the size and nature of intergenerational flows. But at the moment, we may at best speculate about these effects. A promising means to pursue these issues may be to exploit international differences in the structure of support programs for the elderly. This requires, however, a commitment to collecting and maintaining comparable data sets across countries.

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Demography of Aging A third area is simply to extend analyses of transfer motives to a richer set of family circumstances. At present we have little notion concerning how intergenerational links in economic status differ by gender or for children of divorced parents, children of single parents, and so forth. Given the large changes in household structure in the United States over the past two decades, these issues will loom large in the future. Last, despite the fact that the aggregate net flow of transfers is from the old to the young, significant flows occur in the other direction. What determines the extent and timing of these flows? What is their contribution to the distribution of well-being among the elderly? There have been relatively few cross-national studies. Important questions such as the amount of precautionary savings in an economy, the poverty risks associated with widowhood and truly old age, and related issues are just now being explored in this context. Internationally comparable data offer researchers an important window for comparisons. Owing to the similarity of life span across the developed nations, and similarities and differences in relative cohort size, cross-national comparative data on wealth and income should be more fully exploited over the next decade. The policy implications of this research are vital. If we are to provide a more secure, stable, and healthier old age for our citizens, changes in economic status cannot be ignored. If we can answer many of the questions posed here over the next decade or so, we can then turn our efforts and data sets over to the next generation of researchers who can put their minds to worrying about our retirement. REFERENCES Abel, A. 1985 Precautionary saving and accidental bequests. American Economic Review 75(September):777-791. Altonji, J., F. Hayashi, and L. Kotlikoff 1992a Is the extended family altruistically linked? Direct tests using micro data. American Economic Review 82(December): 1177-1198. 1992b The Effects of Income and Wealth on Time and Money Transfers Between Parents and Children. Mimeo, Northwestern University. Ando, A., and F. Modigliani 1963 The life-cycle hypothesis of saving. American Economic Review 53(2):55-84. Andreoni, J. 1989 Giving with impure altruism: Applications to charity and Ricardian equivalence. Journal of Political Economy 97:1447-1458. Ashenfelter, O. 1991 How Convincing is the Evidence Linking Education and Income? Mimeo, Princeton University.

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