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Demography of Aging (1994)

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

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Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

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.

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

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).

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

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.

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

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.

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

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,

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

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).

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

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

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

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

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

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.

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

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.

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

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.

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

TABLE 4-3 Ratio of Household Adjusted Disposable Income: Elderly Median to National Mediana

Living Country/Year

All Heads 65 or Older

Married Couples 65 or Older

Single Female Alone 65 or Older

United States (1986)

85

109

62

Australia (1985-1986)

66

70

56

Canada (1987)

80

88

70

The Netherlands (1987)

88

97

82

Sweden (1987)

82

97

73

France (1984)

93

99

86

Germany (1984)

91

103

83

United Kingdom (1986)

77

83

68

Overall Averageb

83

93

73

a Income is adjusted by using the simple LIS equivalence scale, which counts the first person in the household as 1.0 and all other persons as 0.5, regardless of age. Elderly household heads are 65 or older. Hence, a single aged person needs 50 percent of the income of a three-person household, while an aged couple needs 75 percent as much to reach the same standard of living. Ratios of group adjusted household median to overall adjusted household median income are presented.

b Simple row averages excluding missing values.

SOURCE: Smeeding et al. (1993).

and 1988 (depending on the country). The PSID-GSOEP data cover the 1983-1988 period.

The first question we attempt to answer is how well off the aged are relative to the average household in a society. Comparisons are made on the basis of disposable income, including all forms of cash income (earnings, private pensions, property income, and government transfers net of income and payroll taxes), adjusted for differences in the size and composition of households by using a simple equivalence scale.9 Each country's median income for the aged is divided by its counterpart for the entire population (see Table 4-3).

On this basis the U.S. elderly had a relative median income in the middle 1980s that exceeds the average relative median income of the aged of the entire group by only 2 percentage points (85 versus 83%). The aged in France, Germany, and the Netherlands had higher relative incomes. In

9  

This equivalence scale counts the first person in the household as 1.0 equivalent adults and each additional adult as 0.5. Identical calculations using other equivalence scales produce virtually the same results. The "household" definition is consistent across all countries except Canada and Sweden where we are restricted to the family definition.

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

contrast, U.S. aged couples were the most affluent group by far, owing to their relative youth and the successively higher real economic status of each generation of adults turning 65 (see above). But elderly women living alone in the United States have incomes that are far below the "other country" average, with only Australian single women being worse off.

Measures of "permanent" disposable income for German and U.S. aged over the 1983-1988 period show much the same pattern. Permanent income is estimated as average total income over 1983-1988. Permanent incomes for men in the United States and Germany were 98 to 101 percent of the adjusted mean.10 However, permanent incomes for women in the United States were only 77 percent of the national average, as opposed to 94 percent for German women (Burkhauser et al., 1992:Table 6).

Poverty rates among the elderly are measured relative to various fractions of adjusted median overall income in each nation in the top half of Figure 4-2. The U.S. poverty lines for single persons and couples are about 41 percent of adjusted median income. So the 40 percent poverty line estimates in Figure 4-2 are close to the official U.S. government poverty estimates. Different fractions of median income (e.g., the 50% median rate that is equivalent to the United States 125% "near poverty" figure) produce different poverty rates in each bar. However, with the exception of Australia, by using 60 percent of the median measure, the United States has the highest elderly poverty rates of the countries studied. Obviously, the diversity of economic circumstances among U.S. aged extends to poverty as well as affluence. Of all the countries studied, the United States does the least adequate job of preventing poverty among the elderly.

The PSID-GSOEP comparisons reveal a similar pattern of cross-national differences. The percentage of elderly women who are ever poor (by using a 50% of adjusted median income poverty rate) in Germany is half that in the United States over 1983-1988. In the same vein, the percentage of elderly women who are poor on a permanent income basis is 28.7 percent in the United States compared to 6.6 percent in Germany (Burkhauser et al., 1992:Table 10).

The LIS data can be extended to examine further the relative poverty of single women (Smeeding et al., 1993:Tables 3 and 4). Table 4-3 displays a very large difference in the United States between the median adjusted income of elderly married couples and the median adjusted incomes of single aged women living alone. A natural question to ask is whether the poverty rates for these groups reflect this difference. In the United States,

10  

Here, comparisons are made using the U.S. poverty line equivalence scales for the United States, and the German social assistance and poverty line equivalence scales for German data.

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
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household poverty rates for aged married couples are lower than those for the nonaged population at large, whereas those for single aged women are higher than the average. The difference between the two groups' poverty rates was 11.6 percentage points in 1986, with rates for elderly couples at 6.0 percent and for elderly single women at 17.6 percent. In no other country do we find this same pattern. In every country except Germany (where the differences are small), aged poverty rates—for both single women and couples—are lower than nonaged poverty rates. Hence, elderly single women in the United States are not only the poorest group among the aged, they are also the only group of aged with poverty rates significantly higher than the population as a whole.

Beyond the United States, only in Canada, do we find large positive differences in poverty rates between aged women living alone and elderly couples. However, the differences are much smaller in Canada, and the poverty rates for both groups are below the rate for nonaged persons. In Sweden, the Netherlands, France, and the United Kingdom, poverty rates for both groups are very low and nearly equal. In Australia, Germany, and the United Kingdom, aged single women living alone actually have lower poverty rates than do aged couples.

The Safety Net for the Elderly

Every modern country fights poverty among the elderly differently. The floor for income of the aged in the United States is determined by a mix of SSI, OASI, and food stamps, but presumably primary reliance is placed on SSI. The sum of SSI benefits, plus the $20 monthly disregard for OASI or other unearned income, plus the value of food stamps equals 34 percent of adjusted median income for a single aged person, and 37 percent for a couple (see the bottom half of Figure 4-2). These figures are far lower than those found in other nations; the average benefit for all countries is 53 percent for a single person and 59 percent for couples. Many have pointed out that we "patch together" the safety net for the aged in the United States. The key point, however, is that in the aggregate it does not compare to the income support in other nations, even when we incorporate the $20 disregard for unearned income and near cash benefits such as food stamps.

Countries that rely on a means-tested (welfare) approach such as Australia and Canada have higher guarantees. In addition, Canada does not have a wealth (or assets or resources) test, so there are no "income eligible" but "asset ineligible" aged. Australia has only a means-tested system with large asset disregards and a high guarantee. Between 1981 and 1987, Canada instituted a number of reforms aimed particularly at aged single women living alone. These reforms include a higher Guaranteed Income Supplement (GIS is the Canadian equivalent of SSI) with several specific types of

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

NOTES: 1 Income is adjusted by using the simple LIS equivalence scale, which counts the first person in the household as 1.0 and all other persons as 0.5, regardless of age. Elderly households are those with heads age 65 or older. Hence a single aged person needs 50 percent of the income of a three person family household, while an aged couple needs 75 percent as much to reach the same standard of living. 2 Poverty rates are percentage of persons age 65 and over whose household disposable after-tax incomes fall below the specified percentage of adjusted median income. The U.S. poverty line was 40.7 percent of adjusted income in 1986.

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

Figure 4-2 Poverty and benefit adequacy among the U.S. elderly in a cross-national SOURCE: Luxembourg Income Study as in Smeeding et al. (1993).

NOTES: 3 Minimum benefits as published by the Organisation for Economic Co-operation and Development (OECD) were compared to adjusted median income after adjusting for national price changes. For the United States, the figures include the SSI benefit, plus the OASI disregard, plus food stamps as indicated in U.S. Congress (1992). For other nations the combination of benefits was determined by OECD. In the Netherlands and Sweden, benefits are adjusted for income taxation. Source: Organisation for Economic Co-operation and Development (1988). 4 Simple row averages excluding missing values.

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

income disregards (e.g., veteran's pensions, family allowances) and a 50-percent benefit reduction rate for countable income (which includes Canadian Old Age Social Security benefits, property income, and occupational pensions). As with SSI in the United States, many provinces supplement basic GIS benefits. The net result of these changes was to reduce the poverty rate among Canadian aged women by more than one-half between 1981 and 1987 (Coder et al., 1990; Hanratty and Blank, 1992).

European nations rely mainly on universal social retirement pensions with a relatively high minimum benefit and only a small earnings (or contribution) related second tier. Even the lowest among these, the United Kingdom, has a floor 11 to 12 percentage points above the U.S. minimum benefit. European elderly rely less on occupational (private or public sector, employment-related) pensions and less on asset income than do the U.S. aged. Hence, both low-income aged households and high-income aged households are more scarce in these nations than in the United States.

Summary

A consensus view of those studying incomes among the aged finds them to be on average at par with those of the nonaged, but with a wider variance. Poverty rates among the U.S. aged are lower than those found in the population at large but are high relative to international norms. Although these findings vary slightly, depending on data sets and income measures, they seem robust enough to raise the question: How should the system be modified to ensure adequate income support for the remaining low-income old, especially aged single women, who are rapidly increasing in number and who have historically been at a higher risk of poverty? Related to this issue, research on the income (and consumption) needs of the aged and how they vary between single individuals and couples living alone is sorely needed.

WEALTH

Among the very aged, it can be argued that wealth plays an equal, if not a greater, role than income in determining economic status. We have already seen the effect that imputed rent from the major asset of the aged—their home—has on relative economic status and on poverty. Wealth plays other important roles as well. For instance, the stock of financial wealth—or lack thereof—has an important effect on the flow of income; interest and dividends make up 28.4 percent of the incomes of the nonpoor aged, but only 4.3 percent of the incomes of the poor aged (U.S. Congress, 1992:Table 10, p. 1244). Financial assets also serve as an eligibility barrier to some programs (e.g., Medicaid). Wealth gains provide the wherewithal for the

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
×

aged to transfer assets to children and grandchildren and for other useful purposes (e.g., vacations, medical bills for acute or chronic health care). The role of asset transfers to and from the aged is the topic of the next section of this chapter. Here we deal with what we know about the distribution and disposition of real assets of the elderly—especially financial, but also nonfinancial, assets and the quality of the available asset data.

Wealth and Its Uses

The 1988 Survey of Income and Program Participation (SIPP) wealth data for the aged present a snapshot of the composition of the net worth of the elderly. Home equity represents about 40 percent of total net worth among those 65 and over. Interest earning assets are 29 percent of the total, whereas rental property, real estates, stocks, and mutual funds are another 17 percent of net worth. The rest (14%) is composed of motor vehicles, boats, and other minor categories. Housing is the most equally distributed asset among the elderly, followed by interest earning assets. Most other assets—rental property, real estate, stocks, bonds, mutual funds—are concentrated among the high-income and high-wealth households headed by an elderly person.

Economic theory, in the form of the life-cycle hypothesis (LCH) pioneered by Modigliani, suggests that the aged will draw down their assets as they age. Cross-sectional evidence (e.g., Wolff, 1990; Hurd, 1990) indicates that assets decline uniformly with age. If the mean wealth of persons aged 65-69 in 1988 is indexed to equal 100, the mean wealth of those 70-74 was only 66, and that of persons 80 or over was 41. Of course, these findings offer no strong evidence for or against the LCH. Different cohort or period effects could account for wide differences in wealth accumulation across these age groups just as well as could the LCH.

Studies based on panel data—mainly those from the Retirement History Survey (RHS) and SIPP—indicate that the elderly do dissave (in real terms), albeit at a slow rate. Hurd (1992) uses SIPP and finds that the single aged dissave at an average rate of 3.9 percent per year. Hurd also suggests that singles decumulate faster than do couples, and that the older aged decumulate faster than do younger aged. However, the SIPP data period is very short (only 36 months), and the reasons for asset decumulation are not easily identified. Moreover, because assets decumulate at very low rates, most aged will have net positive balances at death. It could be that the aged plan to leave bequests to their children or make inter vivos gifts; this is the topic of the next section of the chapter. A very real possibility is that assets are kept to meet large expected expenses (vacation cruise, new car, new roof for the house) or unexpected consumption demands (large medical bills) (Hurd, 1992). Finally, it could be that the aged transfer assets in large

Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
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lumps (i.e., voluntarily draw them down) to qualify for Medicaid assistance with nursing home expenses (Moses, 1990; Liu et al., 1990; Spence and Weiner, 1990; Sloan and Shayne, 1992). The exact reasons and means by which the aged draw down assets are still largely a mystery.

Data Quality

The available high-quality data on wealth status, and panel data on change in wealth status, come from three sources: SIPP (1984 and 1988); PSID (1984 and 1989), and the Survey of Consumer Finances (SCF; 1983 and 1989). As argued in Juster et al., (1989) and Juster and Kuester (1991), the quality of wealth data may, and does, vary among surveys in significant ways. Hence, one must be careful to examine the robustness of results across several surveys. Earlier research (Radner, 1983; Wolff, 1985) indicates that the aged are likely to underreport both income from wealth and financial wealth in standard household surveys. However, according to Juster and Kuester (1991), those assets that are typically underreported tend to be found at the very upper tail of the wealth distribution, where a very few households hold large stocks of unreported wealth or where normal sampling methods fail to produce a sufficiently large number of rich aged. The implication of this result is that for purposes of charting the average size and composition of the wealth of the large majority of the aged-those in the bottom 80 percent of the wealth distribution-the most recent household wealth surveys are of sufficient quality. Those interested in the size distribution of wealth per se among the aged (or any other age group) should focus their research on the SCF data where a special "upper tail" of the distribution identified by the Internal Revenue Service has been added to the normal survey.11

Joint Distribution of Income and Wealth

Recent panel data-based research (Juster, 1992) has shown that the pattern of rising income inequality found in the 1980s is reinforced by changes in wealth inequality among these same persons. By and large, the 1983-1989 SCF, the 1984-1989 PSID joint income and wealth data, and the 1984-1988 SIPP data (Juster, 1992; Ryscavage, 1992) each yield three major findings for older households:

  1. The income distribution among older households is more unequal

11  

Because of the undersampling of this upper tail, the levels of total wealth reported in most household surveys provide biased estimates of the size distribution of net worth.

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    than among the rest of the population and did not change appreciably over this period.

    1. Liquid asset holdings increased in value during the 1980s across the entire size distribution of wealth, but especially at the top of the distribution.

    2. Liquid asset holdings among the bottom 30 percent of households (ranked by income or wealth) are not large. For example, in the bottom 30 percent of PSID households (ranked by net worth), they grew from $300 to $500 over the 1984-1989 period.

    In fact, Eargle (1992) shows that in the bottom 20 percent of households ranked by income, heads aged 65 or over (75 or over) had a median net worth of $25,220 ($25,291), of which all but $3,536 ($4,474) was represented by home equity. In contrast, the elderly aged 65 and over (75 and over) in the top quintile of the income distribution had a median total net worth of $343,015 ($390,649) and median financial assets of $208,789 ($252,082). Also Wolff (1990) finds that in 1983, only 10-15 percent of the aged poor had significant wealth holdings, and that various methods for amortizing wealth reduce aged poverty rates by 20 percent at most. Wealth holdings also vary dramatically by race, with blacks having only small fractions of the wealth of whites (Blau and Graham, 1990; Eargle, 1992). The basic conclusion drawn from these studies is that low-income aged generally have low wealth, and that financial wealth is very unequally distributed among the aged by income and by race.

    International Comparisons

    International comparisons of wealth are few and far between (Greenwood and Wolff, 1992; Wolff, 1987; Kessler and Masson, 1988; Smeeding et al., 1993). The most important finding seems to be the gradual but persistent decline in wealth inequality at the very top of the household wealth distribution (the top 1%) during the twentieth century in Sweden, the United States, and the United Kingdom—the only nations for which such data exist. Evidence of wealth holdings by age are even more difficult to come by. According to Greenwood and Wolff (1988), wealth inequality among the elderly in the 1970s and 1980s was higher in the United States than in other countries, and the U.S. aged had a larger share of total household wealth than did the aged in Australia, Canada, or Japan.

    Recently Smeeding et al. (1993) addressed these wealth questions by comparing home ownership and liquid wealth holdings to income using the LIS data base (Table 4-4). Home ownership varies systematically across the nations studied. Between 60 and 75 percent of all aged are home owners in the United States, Canada, Australia, and the Netherlands. In

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    TABLE 4-4 Home Ownership and Median Ratio of Liquid Wealtha to Adjusted Median Income for Elderlyb Households

     

    Median Ratio of Wealth to Income

    Home Ownership

    Country

    All Elderly Households

    All Poor (50%)c Elderly Households

    All Elderly Households

    All Poor (50%)c Elderly Households

    United States, 1986

     

     

     

     

    All elderly households

    5.79

    0.30

    74.5

    60.7

    Single females

    5.19

    0.29

    61.0

    53.5

    Couples

    7.94

    0.51

    89.7

    83.1

    Canada, 1987

     

     

     

     

    All elderly households

    4.43

    0.79

    61.7

    48.5

    Single females

    4.59

    0.27

    39.2

    53.3

    Couples

    5.48

    1.57

    75.5

    43.2

    Australia, 1985

     

     

     

     

    All elderly households

    4.53

    2.22

    77.3

    68.7

    Single females

    3.49

    3.34

    71.8

    81.7

    Couples

    5.59

    2.29

    87.9

    77.6

    Germany, 1984

     

     

     

     

    All elderly households

    2.27

    0.33

    38.7

    40.0

    Single females

    1.45

    0.39

    26.2

    34.5

    Couples

    2.18

    0.21

    50.4

    62.9

    Sweden, 1987

     

     

     

     

    All elderly households

    2.66

    NAd

    26.2

    NAd

    Single females

    2.79

    NA

    12.8

    NA

    Couples

    2.60

    NA

    46.4

    NA

    United Kingdom, 1986

     

     

     

     

    All elderly households

    2.64

    0.68e

    48.2

    53.0e

    Single females

    1.94

    0.11

    37.9

    44.4

    Couples

    3.18

    0.11

    58.5

    53.8

    The Netherlands, 1987

     

     

     

     

    All elderly households

    0.87

    NAd

    71.8

    NAd

    Single females

    0.87

    NA

    78.9

    NA

    Couples

    3.20

    0.14

    NA

    NA

    France, 1984

     

     

     

     

    All elderly households

    3.60

    0.37

    NAf

    NAf

    Single females

    3.89

    0.36

    NA

    NA

    Couples

    3.20

    0.14

    NA

    NA

    NOTE: NA indicates data is not available.

    a Liquid wealth is defined as property income divided by 0.05.

    b Elderly are defined as those households in which the head is age 65 or above.

    c Poor (50%) is defined as households with adjusted incomes below 50 percent of adjusted median household income.

    d Sample less than 25 households.

    e Based on 28 households.

    f Home ownership is not available in France.

    SOURCE: Smeeding et al. (1993:Tables 7,8).

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
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    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    Germany and the United Kingdom, home ownership is much less prevalent, running at 38 to 48 percent levels. And in Sweden only slightly more than 25 percent of all aged households are home owners.12 There is a home ownership gap between poor and nonpoor in all nations except the United Kingdom and Germany. The largest gaps are in Canada, Australia, and the United States. Couples are more likely to be home owners than are single women in most cases. The only anomaly seems to be the higher rate of home ownership among poor single aged women as opposed to nonpoor single aged women in all nations but the United States.

    The LIS data base does not directly measure liquid wealth, but does include nominal property income (interest, rent, and dividends from investments in stocks, bonds, savings instruments, and rental property). In order to approximate liquid wealth, reported property income for each household was divided by an arbitrary 5 percent rate of return in each country. This wealth measure was then divided by adjusted income to produce a median ratio of wealth to income for all elderly families and for poor elderly units. The results of this exercise are consistent with the findings of Greenwood and Wolff (1988) in that the United States has the highest overall ratio of wealth to income (5.8) among the aged as a group and among the single female and couple subunits. Canada (4.4) and Australia (4.5) come next, followed by the other nations. Among the poor, the U.S. aged are at the other end of the rankings, having the lowest, or nearly the lowest, ratios of median liquid wealth to median income.13 It appears that the large variance in aged household incomes in the United States relative to the aged in other nations extends to wealth as well.

    Summary

    Compared to the amount of research devoted to income, the literature on wealth is sparse. We know very little about several key issues (e.g., the relationships and dynamics between asset decumulation among the aged and the many possible reasons for this decumulation). For instance, the relationship among health status, health care expenses, and asset holdings is of particular interest, given the risks to which individuals are exposed under the U.S. health care finance system. However, finding good measures of all

    12  

    This result may be due in large part to high rates of subsidy to rental housing among the aged and special housing for the frail aged in the United Kingdom, Germany, and Sweden.

    13  

    Although interest, rent, and dividends tend to be underreported in most surveys, the underreporting tends to be concentrated at the top of the distribution, thus not greatly affecting the median value.

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    three of these elements of economic status in any single survey is very difficult at this time.14

    Little is known about housing wealth across the older segment of the life-cycle (i.e., how it changes with health status, age, and the disposition of the net proceeds of the sale). The existing literature (e.g., Sheiner and Weil, 1992; Venti and Wise, 1990) provides conflicting guidance on this issue.

    Finally, and perhaps most importantly, the good household wealth data that we do have—and particularly the panel data from the SCF, SIPP, and PSID—are all collected over almost precisely the same time: 1983 (or 1984) to 1988 (or 1989). This period was marked by dramatic changes in the value of wealth—a booming stock market, high real interest rates, and rapidly increasing housing prices. A major question to keep in mind then is the usefulness of wealth estimates for this period in predicting changes in wealth and its disposition for future cohorts. This period effect also demonstrates the way in which a sustained period of growth in income from capital can create large gains in real household net worth.

    INTERGENERATIONAL TRANSFERS

    We turn now to the impact of private transfers of income and wealth across generations. There is a large literature on the economic impact of individual public (government) programs explicitly designed to transfer resources across generations—for example, Social Security (Feldstein and Samwick, 1992)—or from deficit financing of government spending. Indeed, in the extreme, one could compute the net transfers received (or paid) by each generation as a result of all government programs.15 Such issues are beyond the scope of this review, however.

    Even with the focus on private transfers, there remain numerous dimensions to the analysis of intergenerational transfers. One could focus on the direction of transfers, types of transfers, timing of transfers, motives for transfers, division of transfers among recipients, and impact of transfers on donors, donees, and the economy as a whole. Our discussion of each is necessarily brief.16 Moreover, reflecting the focus in the literature, our review places more emphasis on understanding the motive for transfers and their aggregate implications. Only recently has attention turned to documenting the diversity of transfer experience among the elderly.

    14  

    However, the new AHEAD survey is designed to remedy this deficiency.

    15  

    Auerbach et al. (1991) present initial estimates using such an approach.

    16  

    See the chapter by Ronald Lee in this volume for a detailed analysis of intergenerational transfers in an equilibrium context.

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    Transfers across generations are large. Recent estimates place the flow of bequests on the order of $30 billion to $40 billion per year and the flow of ''intended" inter vivos transfers (income support, life insurance, and trusts) at $56 billion per year (Gale and Scholz, forthcoming). Including transfers for college education raises the latter figure to $88.1 billion.17 Moreover, some of the older literature (e.g., Moon, 1977) finds that financial transfers to the aged were almost as large as transfers from the aged in the late 1960s.

    It is important to understand the implications of these transfers for the behavior of both parties to such transactions. Why do such transfers take place, and how are they related to decisions to consume, save, organize portfolios, invest in human capital, purchase durable goods such as housing, supply labor, provide insurance against consumption and health risks, and so forth? From a normative standpoint, one would also like to evaluate the implications of intergenerational transfers for economic efficiency and equity. Since transfers are voluntary (with the exception of unintended bequests at death), it is straightforward to conclude that both givers and recipients are made better off by transfers. But the posttransfer level of well-being may fall short of societal norms, or the transfers may have larger implications for the performance of the economy as a whole, for example, by affecting aggregate capital accumulation.

    Intergenerational transfers constitute an important part of aggregate wealth accumulation, thus influencing the overall path of productivity and real wage growth in the economy. In the life-cycle model of saving (see, e.g., Ando and Modigliani, 1963), capital accumulation stems solely from the decision of individuals to consume below their income during their working years, in order to finance consumption during their retirement. Kotlikoff and Summers (1981), however, estimated that life-cycle motives accounted for a minority of aggregate wealth accumulation; at the extreme, as much as 80 percent was due to intergenerational transfers such as bequests. Modigliani (1988), however, reached the symmetric, but opposite, conclusion that the life-cycle model accounts for as much as 80 percent of accumulation. The primary differences arise due to the treatment of durable goods, expenditures for college education, and assumptions regarding the degree to which inheritances are saved. (See Blinder, 1988, and Kessler and Masson, 1989, for a thorough discussion of these issues.)

    Taking the midpoint suggests that intergenerational transfers account for roughly one-half of wealth accumulation. Other estimates are in the same general range. For example, Hurd and Mundaca (1987) use the 1964 Survey of the Economic Behavior of the Affluent (see Barlow et al., 1966)

    17  

    Gale and Scholz (in press:Table 6) estimate the flow of bequests in 1983 as $47 billion.

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    and estimate that 15-20 percent of wealth stems from inheritances, while 510 percent is derived from gifts. In another approach, Greenwood and Wolff (1990) use the Survey of Consumer Finances to calculate changes in age-wealth profile for 1962-1983. They control these profiles with those predicted by a simulation model of wealth accumulation for representative households. In this approach, the difference between observed and simulated wealth accumulation serves as an estimate of transfers. They find that for ages 20-39, such transfers are roughly 85 percent of wealth, and for ages 40-49 they exceed 50 percent of wealth. In contrast, for ages 50-64, transfers were negative, and amounted to 20 percent of wealth. For the elderly, this fraction rises to more than 50 percent for those over 75. Finally, they estimate that an upper bound of 32 percent of wealth comes from inheritances. 18 As noted earlier, averages may be misleading because there is considerable diversity among the elderly. Also, this approach raises the difficulty that transfers are calculated as a residual and thus carry the brunt of specification errors in modeling household wealth accumulation. Still the results suggest a pattern in which net receipt of inter vivos transfers declines over the life-cycle. Also, these results emphasize the empirical significance of transfers at death.

    In addition to affecting aggregate performance, it is clear that transfers, on average, increase economic inequality. If all transfers were eliminated, inequality in lifetime income would reflect only inequality in labor income, which is much lower than inequality in total income (Auerbach et al., 1992, make this point).19 Their role at the margin, however, may be quite different. If families act to pool risks, and transfers serve to offset shocks to the incomes of family members, transfers may reduce income inequality. In the other direction, if private transfers are responsive to transfers in public programs, it raises the possibility that private transfers may "undo" the desired distributional effects of public sector programs.

    Models of Transfers

    Initial work on transfer motives focused on the altruism model of Becker and Barro (see Becker, 1974, 1981; Barro, 1974) in which individuals care about the welfare of family members. Transfers take place to equalize utility among family members. At the limit, if preferences are identical and there is no income lost as a result of transfers, transfers will flow from

    18  

    See also the extension in Greenwood and Wolff (1992), in which the authors attempt to quantify the importance of three types of effects for wealth accumulation and transfers: life-cycle or age effects, cohort effects, and period effects.

    19  

    This assumes that all individuals earn the same rate of return on saving out of labor income and human capital investments.

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    high- to low-income members, and posttransfer income will be equalized. A closely related notion is the tied-transfer model of Pollak (1988), in which parents also care about the utility of their offspring. In contrast to the pure altruism model, however, parents have preferences about the use of the transfer (i.e., they do not respect the preferences of the recipient). This leads to attempts to tie the use of the transfer to specific purposes. A second related model is the impure altruism model of Andreoni (1989), in which parents value the "warm glow" of giving itself in addition to the welfare of the child.

    The second major group of explanations focuses on exchange-based motives for transfers. In this view, transfers serve as "payment" for services such as visits and telephone calls (Bernheim et al., 1985; Cox, 1987) or for the purchase of insurance against consumption shortfalls (Kotlikoff and Spivak, 1981). Finally, transfers may also serve to overcome market imperfections, such as in the provision of credit (Cox, 1990).

    Distinguishing among alternative models of transfer behavior has important implications. In the pure altruism model, for example, the consumption decisions of a dynastic family are linked. Private transfers will counterbalance attempts to redistribute income among family members, or across generations. In these circumstances, for example, tax and debt finance of government spending will be equivalent (Ricardian equivalence), and the level of private saving and, thus, the resources of the elderly will reflect the desire to transfer resources to future generations. To take another example, in an altruistic framework, bequests will rise to offset taxes on estates, ceteris paribus, leaving the posttax estate at the desired level. In such circumstances, an ostensibly redistributive estate tax may even exacerbate inequality (Stiglitz, 1978). Indeed, in an extreme example, all public sector activities may be "neutralized" by offsetting private actions if altruistic links are sufficiently strong (Berheim and Bagwell, 1988). Thus, transfers will play a central role in determining intergenerational income and wealth mobility, as well as the cross-sectional distribution of income and wealth. For these reasons, discerning the degree to which "bequest motives" determine wealth accumulation has been of central attention in the literature on intergenerational transfers.

    One possibility is that individuals save for life-cycle and precautionary reasons, but die before consuming their entire wealth accumulation (Abel, 1985; Davies, 1981). In such circumstances, bequests may constitute a large fraction of wealth accumulation despite the fact that there are no links (altruistic or otherwise) across generations.

    To test this, one may examine the saving motives of individuals. Hurd (1987) examines data from the Longitudinal Retirement History Survey for evidence of a bequest motive. He focuses on differences in the consumption path (saving rate) of elderly individuals with and without obvious heirs.

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    Since the patterns are similar, he concludes there is no evidence of a bequest motive.

    Bernheim (1991) uses the same data to test the strength of bequest motives. He points out that the Hurd test hinges on the assumption that the marginal utility of bequests is zero if there are no children. His test instead examines the demand for life insurance. The basic notion is that life insurance purchases allow individuals to "undo" the annuitization of their resources due to Social Security benefits and transform their resources into a bequeathable form. Annuities such as Social Security increase the consumption floor of the elderly, but at a cost: they may not be transferred to the next generation. Focusing on changes in Social Security arising from legislative shifts, he argues that increased annuitization was at least in part offset by greater life insurance—evidence of an operative bequest motive.

    Another test is to examine the allocation of intergenerational transfers. The basic altruism model predict that the bequest should compensate for differences in income among siblings. Menchik (1980) and Wilhelm (1991) examine the division of estates among siblings and find it best described as equal sharing, a violation of the compensatory model.20

    Auerbach et al. (1992) revisit the annuitization issue. They use the 1962 and 1983 Survey of Consumer Finances to estimate the degree to which the resources of individuals aged 50 and older are held in the form of annuitized wealth (e.g., Social Security, defined benefit pensions). They find that annuitization has shown a marked increase, especially for two groups: those over 75 and elderly women. This is an important finding in itself. Although the location of the best consumption floor remains open to debate, increased annuitization makes the existing resources of the elderly more secure against the risk of a longer than expected retirement period. As a result of this phenomenon, the authors estimate that the flow of bequests in 1983 (which they approximate at $58 billion) is 20 percent smaller than it would have been at the 1962 degree of annuitization. They further point out that these individuals had the opportunity to purchase life insurance, and thus transfer the wealth across generations, but did not. Thus, it suggests that bequest motives may be less important than life-cycle or precautionary saving desires.21

    20  

    But see also Tomes (1981), who argues that bequests do compensate.

    21  

    Some have argued (see Kessler and Masson, 1989) that a single model may not be appropriate for all households. For example, low-income households seem to accumulate little saving at all. Hubbard et al. (1992), however, use a simulation model to examine the interaction between the social insurance system and household saving. Many social insurance programs have asset tests, which effectively "tax" saving at prohibitive rates. They find that these incentives may explain the low wealth accumulation of low-income individuals, who are more likely to fall into these programs. As a result, the low wealth accumulation of these individuals does not necessarily constitute evidence against the life-cycle model of saving.

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    More direct evidence on the intentional transfer of resources is offered by Gale and Scholz (in press), who focus on intended inter vivos transfers. By focusing on this subset of transfers, they eliminate the ambiguity posed by bequest motives. Using the SCF data, they estimate that intended intergenerational transfers—support, life insurance, and trusts—are at least 20 percent of wealth. Because it ignores a large fraction of intergenerational transfers (college expenditures and bequests), they argue that this estimate constitutes a lower bound for the contribution of operative intergenerational linkages to aggregate capital accumulation.22

    Gale and Scholz make no attempt to distinguish between intentional transfers for altruistic versus exchange reasons. Using a second data set with detailed information on inter vivos transfers, Cox (1987) finds that the data are more consistent with exchange-related motives. Using data drawn from the President's Commission on Pension Policy (PCPP), Cox concludes that contingent upon receiving a transfer (and controlling for other factors), the amount of the transfer rises with the recipient's income. The simple altruism model would predict compensatory transfers (i.e., those that fall with income). In the context of an exchange model, however, higher income proxies for a greater value of time and a higher price of services. Thus, the transfer must rise in order to acquire services. Altonji et al. (1992b) note, however, that this test relies on special assumptions; in the presence of unobserved heterogeneity of preferences and a diminishing marginal utility of wealth, the test is not valid.23

    Similarly, Cox and Rank (1992) use the National Survey of Families and Households, as described by Sweet et al. (1988), to reexamine the exchange model of transfers. The basic model is the same as Cox (1987), and the basic result is the same: conditional on receiving a transfer, the amount of the transfer rises with recipient income. 24 An unsettling aspect of the study, however, is that the measures of services (contacts and help) are not significantly correlated with transfers, thus calling the exchange motive into question.25

    22  

    The Gale and Scholz study is one of the few to examine differences in transfers along racial lines, finding that there are large differences in average amounts of transfers between blacks and whites, although race per se appears to have little effect on the propensity to transfer. Instead, the other variables (income, etc.) explain this difference.

    23  

    The data set does not contain information on the income of donor (Cox uses the mean for the donor's census "survey block" as a proxy). Since it is the relative income of the donor and recipient that should determine the probability of making a transfer (see Altonji et al., 1992b), this raises the specter of misestimation in the first stage.

    24  

    Cox and Rank control for permanent income of the donor through the use of characteristics of donors, an improvement over Cox (1987) that reflects the liquidity constraints found by Cox (1990).

    25  

    One possibility is that the services could be rendered at a later time. The data requirements to examine both the existence and the timing of exchange are quite severe.

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    As noted earlier, transfers may also be motivated by the desire to overcome credit market constraints. Cox (1990) uses the PCPP data to find that transfers rise with the ratio of permanent to current income for recipients. He interprets this as evidence that transfers flow to those whose current earnings fall short of their optimal unconstrained consumption path. The qualitative nature of the results is not affected by dropping college students or by eliminating those that share living quarters with the donor. Of course, the difficulty in executing such a test is the need to generate a predicted, or fitted, value of permanent income and the inability to control for the characteristics of the donor.

    Finally, transfers may reflect the purchase of insurance against consumption risks. Altonji et al. (1992a) find that the extended family tends to weakly stabilize consumption (i.e., to act as a risk-pooling device). Specifically, individual's consumption is positively related to family income, ceteris paribus. They conclude, however, that altruistic links are far from perfect. An alternative approach would be to employ the direct tests for consumption insurance in Cochrane (1991) or Mace (1991) to examine directly the extent to which the consumption of the elderly is de facto ensured against idiosyncratic shocks. Of course, the difficulty with such an approach is the absence of high-quality data on the consumption of the elderly.

    Thus far, the discussion has focused on transfers from the elderly to younger generations. Evidence suggests, however, that roughly 20 percent of the elderly receive some sort of financial transfers from adult children (Soldo and Hill, 1991; Stephen et al., 1991). Similarly, there is evidence that younger generations pay (at least in part) the costs of in-home personal care for the elderly (Liu et al., 1990; Wiener and Hanley, 1992), as well as purchase costs of technologies to assist the parent and of improvements to the accessibility of homes.

    As with transfers in the other direction, theories of altruism postulate that children make financial transfers to their parents because they care about their well-being. In contrast, exchange theories suggest that the inter vivos transfer compensates for a service provided to the child or, perhaps, a larger inheritance.

    In this setting, the particular attributes of the exchange may be different. For example, the child of an infirm parent may wish that the parent continue to live in a separate dwelling. Alternatively, the child may wish the parent to avoid depleting the entire estate simply to qualify for Medicaid. In such a setting, the amount of the transfer will rise as the parent becomes closer to needing help in self-care or closer to moving in with the child. In these cases, it becomes more costly for the child to "purchase" his or her independence. If the transfers are tied, the child designates the particular purpose for which the transfer may be used. In an extreme case, the child purchases directly on behalf of the parent.

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    The empirical evidence concerning the various economic models is quite sparse. Thus far, for example, there is no general evidence concerning the determination of transfers of time or financial support to the elderly. Indeed, one would expect that there would be substitution between the two types of transfers; the greater the value of time for the child, the more likely he or she is to make a transfer in financial terms.

    In sum, the research to this point is inconclusive. There appear to be several plausible motives for transfers of wealth across generations, and no single "smoking gun" explanation dominates the others. The hypotheses about the motives for transfers indicate the need for a better understanding not only of contemporaneous flows of time and money, but also of the possibility of trading exchanges across time. Put differently, the timing of transfers may be as important as the existence of the transfer itself.

    Economic Impact of Transfers on Households

    Intergenerational transfers are of interest in part because of their contribution to intergenerational income mobility. Recent evidence suggests that there are significant links between the economic status of fathers and sons as measured by earnings and incomes. Solon (1992) uses the PSID to test whether there is rapid regression (across generations) toward the mean in incomes. He finds a correlation in economic status (income) of 0.4 between fathers and sons. Similarly, Zimmerman (1992) uses the 1966 cohort of the National Longitudinal Study and estimates that the elasticity of sons' incomes with respect to fathers' incomes is roughly 0.4—the same as Solon. Finally, using a different measure of the link, Wilhelm (1991) finds that elasticity of son's income with respect to father's income is 0.4 using a high-income sample. 26

    These studies estimate reduced-form correlations, with no attempt to identify means by which status is transferred. As noted in Gale and Scholz, however, roughly 13 percent of those age 65 or older make transfers for the purpose of college education. The transfers are large in the aggregate (transfers for college expenses are roughly $32.5 billion, or nearly 60% of all intended transfers) and average more than $9,000 per donor, and the propensity to make such a transfer is greater for high-income individuals than for low-income individuals. Combined with high estimates of the return to

    26  

    A drawback to these studies is that each relies on data for the same historical period, and each focuses on father-son correlations. Thus, it is difficult to extrapolate these results to the future, and they provide little insight into the mother-son, father-daughter, etc., links that will become more important as children of both sexes raised within both single- and double-earner families enter the labor force.

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    education (see Ashenfelter, 1991), this evidence suggests that inter vivos transfers for college education are central to the effects of transfers on intergenerational economic mobility as a whole. The incentives for private expenditures on college education are interesting for other reasons as well, since they may be offset by changes in public support for higher education. On this issue, however, there is little information.

    In an early study, Lampman and Smeeding (1983), using information culled from a variety of sources, found that the ratio of private transfers to public transfers fell over time. They were able only to conjecture, however, regarding the causal links between the two series. More recently, however, Schoeni (1991) used the transfer supplement to the 1988 PSID to provide microeconomic evidence on crowding out of transfers. He finds that 26 percent of those getting Aid to Families with Dependent Children, Unemployment Insurance (UI), or workers' compensation in 1987 also received private transfers, but that the private transfers averaged only 4 percent of income. Focusing only on those receiving UI, he also concludes that government transfers "crowd out" about 30 percent of private transfers.27

    Virtually every study of intergenerational transfers treats income as exogenous, but there is evidence that transfers may also affect labor supply. Holtz-Eakin et al. (1993) examine income tax data on the labor-force behavior of people before and after they received inheritances, and find that the likelihood that a person decreases his or her participation in the labor force increases with the size of the inheritance received. As noted in the introduction, this suggests a need to reexamine studies of the life-cycle hypothesis that assume a donee's labor supply response to inheritance is perfectly inelastic and casts doubt on the validity of simple altruism models that assume dynastic families freely optimize with respect to a single generationally linked budget constraint.

    Wilhelm (1992) analyzes changes in hours worked before and after receipt of an inheritance, using a small subsample of the PSID, and finds no relationship. However, the PSID relies on self-reported values of inheritance; Menchik (1988) has documented that such measures are subject to substantial error.

    27  

    Schoeni argues that pure altruism predicts a one-for-one crowding out, whereas the tied-transfer model (Pollak, 1988) is ambiguous. Exchange theory, however, is even less clear. Cox and Rank (1992) point out that in an exchange model of transfers, public transfers may not crowd out private transfers (and vice versa). Instead, by raising his or her bargaining position, the public transfer may augment private transfers to the individual. Warm-glow giving offers a strong prediction of no effect.

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    Summary

    From the research surveyed above, the following broad picture emerges. First, there are extensive intergenerational links and these links are inconsistent with simple models of altruism alone. Second, although the bulk of research has focused on aggregate issues, there are important unexplored issues in heterogeneity. Third, inter vivos transfers are quantitatively more important than bequests and are more prevalent across all parts of the income distribution. Despite this, the majority of attention has been focused on bequests. Finally, no study has simultaneously considered inter vivos transfers and bequests. As a result, our understanding of the forces driving net intergenerational resource flows is necessarily incomplete.

    TOMMORROW'S ELDERLY AND RESEARCH ISSUES

    Evidence from the 1950 to 1980 censuses (Smolensky et al., 1988) and from wealth surveys taken between 1962 and 1989 (Wolff, 1985; Avery et al., 1984; Juster, 1992; Eargle, 1992) indicates that the current generation of "young" elderly (i.e., those born between 1920 and 1930 who reach age 65 between 1985 and 1995) will be better off as a group than yesterday's elders. This age group (aged 30-42 in 1960) has had the good fortune to be in their prime working years during the period of rapid earnings growth in the halcyon 1960s, to have had the value of their homes soar during the inflation of the 1970s and early 1980s, and to be in the portfolio position to capture the high real interest rates and stock market boom of the 1980s. Indeed, individuals born in the 1920s have been dubbed the "good times" generation (Moon and Smeeding, 1989). The 1983 SCF (Avery et al., 1984) indicates that the mean net worth of those 55-64 in 1983 (who were born between 1919 and 1928) was 84 percent above the national mean net worth. Similar earlier surveys for 1962 and 1969 indicated that the 55-64 year olds in those years (whose survivors are among today's elderly) had net worth holdings that ranged only from 39 to 56 percent above the national average.

    The generation that will become aged before the turn of the century and shortly after is also more likely to have a greater fraction of long-term two-earner families, and hence a larger share of persons receiving higher than average amounts of private pensions and larger Social Security benefits than any preceding generation. Grad (1992) indicates that 57 percent of aged couples, 41 percent of unmarried men, and 32 percent of unmarried women received some form of private pension in 1990. Simulations by various consultants as reported in Reno (1992) forecast large increases in these ratios, to 86, 70, and 50 percent, respectively, by 2010.

    On the other hand, the least interesting statistic among the aged is the

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    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.

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    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.

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    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.

    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

    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.

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    Suggested Citation:"4 Income, Wealth, and Intergenerational Economic Relations of the Aged." National Research Council. 1994. Demography of Aging. Washington, DC: The National Academies Press. doi: 10.17226/4553.
    ×

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    ×

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