America's Well-to-do Elderly

March 23, 1992  ·  Michael Fumento  ·  Investor's Business Daily  ·  Economy

To many Americans, the image of the elderly is that of Charles Dickens’ Old Betty Higden, in Our Mutual Friend, whose highest hope was to "earn a spare bare living, and quietly to die, untouched by workhouse hands." Not so long ago, there was much truth to this image.

In 1960, 70% of single Americans 65 or older lived below the federal poverty line, compared with about 33% of those under 65.

In the same year, about 35% of married Americans 65 and over lived below the poverty line, compared with about 19% of those under 65 with children and 12.5% of those without children.

But in recent years, for a variety of reasons, there has been a tremendous turnaround in the financial position of the elderly as a whole.

By 1989, only 23.5% of singles over 65 remained below the poverty line — a line that doesn’t take into account many government benefits — while only about 5% of married people 65 and over qualified as poor.

By contrast, about 40% of single parents with children in 1989 officially qualified as poor.

While they continue to be seen by many as living hand to mouth, with a cupboard stocked with pet food but no pet in the house, according to the U.S. Census Bureau the 64 million Americans who are 50 and older, while constituting only about a quarter of the population, hold 75% of the nation’s financial assets and about half of the discretionary income.

Said C. Colburn Hardy, the 82-year-old co-author of Social Insecurity, published earlier this year: "The stuff about the little old ladies eating cat food — that’s a bunch of crap."

The cat-food cliché should be laid to rest.

In terms of pretax cash income, the elderly are slightly better off than average. And they are much better off in terms of after-tax income. Even the poorest fifth of the elderly still do better, on average, than do younger people who are in the poorest fifth of their respective categories. No one advocates a return to the days when old age equaled poverty, nor does anyone begrudge those upon whose backs the U.S. became the defender of democracy and the most powerful nation on Earth.

But some point out that much of the newfound wealth of the elderly is coming as a result of a massive transfer of money by the federal government away from younger people who are working and are struggling not to achieve a better lifestyle than their parents before them, as has historically been the case in the country, but merely to keep from slipping back.

Nowhere is this more readily apparent than with regard to what some consider the most important part of the American dream: the ability to buy one’s own house.

It is widely believed that fewer and fewer Americans are able to afford their own homes. And in fact, over the past two decades, overall home ownership rates have remained flat at about 64% of the population.

But the overall rate hides one key fact. The ownership rate among younger Americans has been dropping drastically.

In 1973, over 23% of Americans under 25 owned their own homes. By 1989, this share had dropped to 17.6%, an overall decline of 25%.

For ages 25 to 29, home ownership declined 19% in that time period, while for those 30 to 34, it declined 11%.

But as age increases, the home ownership rate’s decline gets smaller. By the time Americans reach the 55 to 64 age group, they register a strong increase in home ownership. Those 65 to 74 showed an almost 10% increase in home ownership between 1973 and 1989.

Thus, while home ownership rates overall haven’t changed, the ability of those of different age categories to buy homes has changed significantly.

Affordability Gap Young people are finding that while they may be achieving higher education levels than their parents, they cannot afford the same houses their parents bought.

While many factors influence home ownership, clearly one of the most important is income. And again, the problem with the trend in income is easy to miss.

Real income has continued to go up in recent years, albeit at a slower pace than for most of the postwar era. But this gain recently has been among those 45 and above, especially those 65 and above. For those 45 and below, the peak year in postwar earnings was 1973.

Yet even this is not a complete picture because it looks only at gross income. Workers can’t spend their gross income but only their net income — what’s left after taxes.

An idea whose time has gone?

Because of increases in taxes, and especially in Social Security taxes, net income for younger people has actually been dropping over the past few decades. In the 1940s, the combined worker-employee Social Security tax was 2%. By 1973, it was 11.7%, and since then it has jumped to 15.3%.

That leaves less money for houses, cars, vacations, food and clothing. And since businesses pay half of the 15% Social Security levy, it’s a major disincentive for companies to hire new workers — further hurting incomes.

Some critics maintain that if a society is judged by how it treats its elderly, it is also judged by how it treats its children. They point out that Americans over 65 receive more than twice as much per person from federal, state and local governments than do those below the age of 18.

C. Colburn Hardy told Investors Business Daily, "It’s a good pitch to say that we’re poor" but that much of what the elderly receive is "largesse."

Activist Groups Activist groups like the American Association of Retired Persons (AARP) and the Gray Panthers, he said, "are after anything they can get their greedy hands on."

As for the elderly in general, he said, "You can’t blame them entirely — they’re living too long," and thus collecting more years of benefits than had been anticipated.

He does, however, blame the media for failing to point out how well-off elderly persons have become. "Reporters and editors are very scared of old people" he said. "Maybe it’s a parental authority kind of thing."

But Judy Schub, federal legislation director with the AARP, said Social Security is "the most popular government-created program" for many reasons, including that it isn’t just for old people but that there are also "three million children on it and millions of disabled and families of the disabled" who receive benefits.

Still others note that old age is often a time of hardship.

Hardy says the best way to straighten out the system is to apply a means test so that money goes to those who really need it — as opposed to those who are simply above a certain age, as is currently the case.

"What does a billionaire need Social Security for?" Hardy asked.

Neil Howe, an economist who does work for the National Taxpayers Union in Washington, has calculated that $14 billion from Social Security in 1981 went to recipients with cash incomes of more than $100,000.

Means Testing One advantage of means-tested programs for the elderly is that they don’t cause the kind of economic distortions that poverty programs for the young can give rise to, such as encouraging people not to get jobs.

But efforts to apply means testing to entitlement programs affecting the elderly are always met with fierce resistance.

When President Bush, in his January State of the Union address, suggested a means test for Part B of the Medicare system — which covers such supplementary things — the Leadership Council of Aging Organizations, or LCAO, a coalition of 30 groups, labeled the plan "corrosive" and said, "Charging higher premiums for well-off seniors will raise few dollars for Medicare while adding a divisive welfare component to this entitlement."

In fact, the LCAO and other groups, such as Ralph Nader’s Public Citizen in Washington, have called for a significant expansion in government entitlements for the elderly in the form of long-term medical care.

As things now stand, the elderly can, and often do, receive such care free from the government under Medicaid, which is a means-tested program. About 40% of Medicaid expenditures go to the elderly.

But in order for recipients to qualify, their assets must drop below a certain point. Advocates for the elderly refer to this as "exhausting" the assets, but actually recipients are currently allowed to retain their house and thousands of dollars in additional assets.

Simply Not Affordable Under the proposed system, they would qualify for free long-term help while still being able to hold on to all of their assets and income.

But critics such as James Davidson, chairman of the National Taxpayers Union, say that while in a more perfect world this would be desirable, in a world of scarce resources this program is simply not affordable.

Davidson points out that while virtually all of the elderly in this country presently have access to health care, 22% of those 16 to 24, 16% of those 25 to 34, and 15% of those under 16 have no health insurance whatsoever.

One specific proposal for long-term health care, outlined in the Journal of the American Medical Association in December, would initially cost $75.5 billion a year. Proponents stated that actually only $23.5 billion in new funds would be needed, that the rest is already being spent on long-term health care and would merely have to be switched into the new system.

But the real switch would involve who is paying that $52 billion. Instead of its being paid by the elderly persons using the medical care, the bill would be footed almost entirely by working taxpayers not taking advantage of the medical care. In other words, this proposal would involve a $75.5 billion transfer of wealth from the working to the elderly.

That would come out to $380 to $410 a year in additional taxes for the average taxpayer.

Joshua Wiener of the Brookings Institution, a liberal think tank in Washington, said that the $75.5 billion estimate "is probably pretty good," although he points out that with medical costs outstripping the consumer price index and with the continued aging of the population, the cost of long-term health care is expected to more than double by 2020.

Joel Hay, a health economist at the University of Southern California, said that the program could actually expand much faster than that, because "it’s such a difficult-to-define thing that there’s no limit to how much you could pour into it."

’Out Of Control’ Schub of the AARP grants that all health-care costs in the country have "gone out of control" and that systemic reform is needed, but she says that long-term care funded by the government is just a way of distributing risk so that it won’t fall unevenly on the elderly who end up needing an extraordinary amount of long-term care, and on their families.

"The way we do it now, it’s a crap shoot," she said.

To young people struggling to make ends meet, this is the face of the enemy.

"We’re not talking an old folks bill," she said. "It’s family protection, because it’s families who bear the burden." Indeed, Schub said, the burden often falls on the "sandwich generation" — the one that’s supporting both kids in college and elderly parents.

But enough is enough, Davidson says of the long-term proposal.

"This protects assets, not people," he said. "The younger generation is worse-off every year, and to stick this on top is morally decrepit."

He added, "This is just greed."

Davidson and others say that what is needed is not an expansion of entitlements flowing from workers to the elderly but a long-term contraction, that the alternative as the population ages is a tremendous increase in Social Security and Medicare taxes that will devastate workers’ salaries and throw the economy into a tailspin by punishing those who work and subsidizing those who do not.

Baby Boomers’ Children Said Dorcas Hardy, who co-authored Social Insecurity with her father, "The baby boomers’ children are going to be taxed tremendously, on the order of 40% (in addition to income tax) to provide baby boomers the same munificence that the elderly are now receiving."

Most critics of Social Security, such as Hardy, do not advocate reducing the benefits of those already collecting from the system — whom critics largely agree deserve to have the promises that were made to them fulfilled.

But the critics do advocate a variety of reforms to reduce benefits to later recipients, including means tests, raising the retirement age, pegging benefit raises to the consumer price index instead of to the more rapidly rising wage index, and some form of partial privatization of benefits.

Already, Hardy said, "Seventy percent of American families and more than 50% of American workers are paying more in Social Security taxes than they are in income tax. That to me is astounding."

She added, "I do see generational warfare coming if we don’t address the issue now instead of later."