[Economic Report of the President (1999)]
[Administration of William J. Clinton]
[Online through the Government Printing Office, www.gpo.gov]




CHAPTER 4
Work, Retirement, and the Economic Well-Being of the Elderly

Just 50 years ago, the baby boom was getting under way, and about 1
out of every 12 Americans was 65 or over. Today, about one out of every
eight Americans is elderly, and the oldest baby-boomers are preparing
for retirement. As the baby-boomers continue to age, the elderly
population will rise dramatically. It is projected that by the time the
youngest baby-boomers hit age 65, in 2029, almost 20 percent of
Americans will be elderly--about 2H times the proportion in 1950.
As America adjusts to this phenomenal demographic change, it is
important to assess the economic well-being and work decisions of the
current and the soon-to-be elderly. A review of statistics on the well-
being of older persons and the labor market outcomes of workers who are
approaching retirement age yields four important conclusions. First,
long-term trends in the labor force participation of older Americans,
both male and female, are changing. The century-long decline in male
labor force participation at older ages has leveled off since 1985. More
men aged 55-64 are continuing to work, often part time or in a different
occupation, after ``retiring.'' Meanwhile the share of women aged 55-64
participating in the labor force has increased by almost 10 percentage
points in the past 15 years.
Second, employer-provided pensions and health insurance are also
undergoing rapid change. The share of participants in defined-
contribution pension plans, such as 401(k) plans, is growing and the
share in defined-benefit plans shrinking. Employer-provided health
insurance coverage for retirees has also become less widespread, less
generous, and more expensive. These developments have many
ramifications, both for retirement incentives and for the incomes and
living standards of retirees.
Third, the economic status of the elderly as a group has improved
remarkably during the past three decades. Their poverty rate has fallen
to less than half what it was in 1970. In that year the elderly were
more than twice as likely to live in poverty as the nonelderly, but
today poverty is slightly less prevalent among the elderly than it is
among younger persons.
Finally, the elderly are a diverse group, which means that averages
can be quite misleading. In particular, although most elderly groups--
men and women, blacks and whites, older and younger elderly, single

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as well as married persons--have enjoyed economic progress, large
disparities in well-being prevail among these groups. The most recent
data show that just 4.6 percent of elderly married men, but 28.8 percent
of elderly black women and 17.9 percent of elderly widows, live in
poverty. And whereas Social Security benefits account for at least 80
percent of income for 38 percent of all elderly households, another 9
percent rely on Social Security for less than 20 percent of their
income. Moreover, among those now approaching retirement age, over 10
percent have no financial savings whatsoever, and 30 percent have less
than $1,200, whereas the top 10 percent have over $200,000 in financial
assets. Over half of all blacks and Hispanics aged 51-61 have no
financial holdings.

POPULATION AGING, LIFE EXPECTANCY, AND HEALTH STATUS

As we approach the 21st century, the confluence of a reduction in
fertility and improvements in longevity is causing the share of older
people in the population to rise. The total fertility rate--the number
of children that an average woman will bear over her lifetime--has
declined substantially since the turn of the century. This decline was
not a steady, uninterrupted one, however: a substantial increase in
fertility was associated with the baby boom of 1946-64. The total
fertility rate increased from 2.3 in 1940 to 3.8 at the peak of the baby
boom in 1957. It then fell to 3.2 by the end of the boom, and today the
total fertility rate is about 2.0.
Life expectancy has risen throughout the 20th century. Americans
today are more likely than their parents and grandparents to reach old
age, and having reached that threshold they live a greater number of
years thereafter. In 1900, 65-year-old men and women had similar
remaining life expectancies, at 11.4 years and 12.0 years, respectively
(Chart 4-1). These figures had risen by mid-century to 12.8 years for
men and 15.1 years for women. The 1950s and 1960s saw substantial gains
in life expectancy for older women, but stagnation for older men. Since
the 1970s, however, strong gains have occurred for both sexes. Current
life tables indicate that 65-year-old men and women today can expect to
live an additional 15.7 years and 19.2 years, respectively. And
projections imply that life expectancy will continue to increase in the
next century.
The anticipated transition of the baby-boom generation into old age
has drawn attention to the aging of the population. The baby-boomers,
who are currently between the ages of 35 and 53, will begin to reach age
65 by 2011. Chart 4-2 shows this bulge in the population, which swelled
the number of children and adolescents 30 years ago. This group will
reach retirement age over the next 30 years. Although the growth rate of
the elderly population will be very low between 1995

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and 2010 as a result of low fertility in the 1930s, that rate will more
than double in the following 20 years. Also as a result of the baby
boom, different age groups among the elderly will peak at different
times: those between 65 and 74 will peak at 38 million in 2030, and
those 75 to 84 will peak at 29 million 10 years later.
The ``oldest old,'' those aged 85 and over, are of particular
concern because of their high rates of poverty and institutionalization,
described below. This group will grow both in number and as a share of
the population, from about 4 million today to 18 million by 2050.
Accounting for about 1.5 percent of all Americans today, the oldest old
are projected to make up 23 percent of the elderly population and about
5 percent of the overall population 50 years from now.
At the same time that the size of the elderly population is
increasing, its racial, ethnic, and gender composition will also change.
In 1998 the non-Hispanic white population accounted for the largest
proportion of elderly, and their number is projected to nearly double to
52.0 million by 2050. But the proportion of non-Hispanic whites in the
elderly population will decline as the numbers of elderly persons of
other racial and ethnic groups grow even faster, causing their
proportion of the elderly population to double (Chart 4-3). The elderly
Hispanic population, for example, is expected to grow to 13.8 million in
2050, or eight times what it was in 1998. In 1994, elderly women
outnumbered elderly men by a ratio of 3 to 2 overall, and by 5 to 2
among those over 85. About half of elderly women were widowed, more than
three times the percentage for elderly men, who were nearly twice as
likely to be married.

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Population aging is not just an American trend but a major global
phenomenon--a natural result of better health and nutrition and lower
fertility and mortality rates worldwide. Never before have so many
people in so many societies lived for so long. Yet as much as population
aging is a natural result of the benefits of increased longevity and
survival among all age groups, it also represents a fundamental shift in
social structure that affects labor markets, family structures, and the
social contract among generations.
Increasing life expectancy does not automatically imply that health
status has improved. In fact, despite improvements in mortality at older
ages in the 1970s, some studies claim that the health status of the
elderly worsened during that period. But since 1980 the evidence points
to a decline in chronic disability among the elderly. In 1994 the number
of people aged 65 and older who were disabled (that is, who had
functional problems lasting 90 days or longer in dealing with various
normal activities of daily living) was 14.5 percent (or 1.2 million)
lower than would have been expected if the age-specific chronic
disability rates observed in 1982 had persisted. This decline was found
to have contributed significantly to reducing the rate of
institutionalization between 1982 and 1994. However, many older
Americans still require long-term care (Box 4-1).
Although disability rates have declined they are much higher in
lower socioeconomic groups. In 1993, for example, persons aged 50 and
over who had not graduated from high school tended to perform much worse
on four measures of physical functioning than did those who had attended
college.

OLDER WORKERS AND RETIREMENT

Retirement patterns have been changing over time in response to
changes in institutions and in the preferences and practices of
employers and workers. These changes are reflected in changing long-term
trends in the labor force participation of the elderly (that is, the
proportion of the older population who are either employed or looking
for work), particularly the decline in labor force participation rates
of older men during most of this century. Recent years, however, have
seen a leveling off of this decline. Since the mid-1980s, 55- to 64-
year-olds in each year have been just as likely to be in the labor force
as those in the preceding years. They have been more likely to work part
time and less likely to work full time, however. This section reviews
these changing patterns of retirement and their causes. It turns out
that a variety of factors influence the timing of retirement, such as
the rules governing pensions and Social Security benefits,
characteristics of jobs held by the elderly and accommodation made to
impaired elderly workers, and health insurance coverage. The section
concludes with a discussion of unemployment, job loss, and tenure as
experienced by the elderly.

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Box 4-1.--Easing the Burden of Long-Term Care

Like Social Security and Medicare, long-term care will become a
primary concern of baby-boomers as they approach retirement age. In 1994
an estimated 2.1 million elderly living in the community needed help
because of problems with three or more activities of daily living (such
as eating, bathing, dressing, or moving around) or because of a
comparable cognitive impairment. That number will rise as the population
ages, and the fast-growing population of the ``oldest old,'' those 85
and older, is at greatest risk.
Much long-term care today is provided informally: about 65 percent
of elderly persons living in the community and needing long-term care
assistance rely exclusively on unpaid sources, most often family and
friends. Surveys have found that 8 of every 10 caregivers provide unpaid
assistance averaging 4 hours a day, 7 days a week. For many, such
assistance competes with the demands of paid employment. In addition,
home and community-based care requires substantial out-of-pocket
expense, totaling over $5 billion in 1995.
The Administration has proposed four initiatives to help relieve
the burden of families with members in need of long-term care. The first
is a tax credit of up to $1,000 for people of all ages with three or
more limitations in activities of daily living (or a comparable
cognitive impairment). Persons needing long-term care themselves, or
their family members who care for and house them, can claim the credit,
which phases out at incomes of $110,000

LONG-TERM TRENDS IN LABOR FORCE PARTICIPATION AT OLDER AGES

Labor force participation rates for men 55 and older have declined
during most of the 20th century. For example, the participation rate of
men aged 55-64 fell from 89.5 percent in 1948 to 68.1 percent in 1998
(Chart 4-4). These trends in labor force participation are the result of
two factors: trends in retirement age and trends in longevity. The
average retirement age depends on the retirement rate at each age, and
retirement rates have been increasing at younger ages and decreasing at
older ages. Consequently, the estimated median age of retirement
(defined as complete withdrawal from the labor force) for men declined,
from 66.9 years in the 1950-55 period to 62.1 years in 1990-95.
Early in this century, most men worked until they died or became
disabled, and both death and disability tended to occur at much younger
ages than today. Today more men live longer after retiring than they did
in earlier decades. Over the 1950-95 period, male life expectancy at age
65 rose by 20 percent. This helped to reduce over time the participation
rate of men 65 and older, by increasing the

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Box 4-1.--continued

for couples and $75,000 for unmarried taxpayers. The credit would
provide financial support for about 2 million Americans, broadly
expanding an existing set of tax allowances. Under current tax policy,
taxpayers can claim the child and dependent care tax credit to cover
part of the cost of care of a disabled spouse, when that cost is
incurred by the taxpayer in order to work. A taxpayer who itemizes can
also deduct any qualified long-term care expenses that exceed 7.5
percent of adjusted gross income. The new tax credit would defray some
costs of both formal and informal care. Over half the chronically ill
people thus helped will be elderly persons.
Second, the National Family Caregiver Support Program would fund
State initiatives establishing ``one-stop shops'' that assist families
caring for elderly relatives through training, counseling, and arranging
for respite care.
Third, the Administration has proposed a national campaign to
educate Medicare beneficiaries about the program's limited coverage of
long-term care and help inform their care decisions. The need for
information is great: nearly 60 percent of Medicare beneficiaries are
unaware that Medicare does not cover most long-term care.
Finally, the Administration has proposed that the Federal
Government serve as a model employer, by offering nonsubsidized, quality
long-term care insurance to all Federal employees and using its market
leverage to negotiate favorable group rates.
denominator (the total number of men in this age group). Therefore, the
participation rate of men aged 65 and over has declined even more than
the decline in average retirement age might suggest.
Meanwhile the labor force participation rate for women aged 55-64
has actually increased since 1948--in fact it has more than doubled,
from 24.3 percent to 51.2 percent (Chart 4-4). This has happened despite
a decline in women's median retirement age, from 67.7 years in 1950-55
to 62.6 years in 1990-95, because more recent cohorts of women have been
more likely to be in the labor force during most of their adult lives
(Chart 4-5).
In the face of long-term improvements in health and longevity, why
has the retirement age fallen, not risen, during the 20th century?
Rising wages are a large part of the answer. As their earning power has
risen, men have enjoyed both more income and more time for activities
other than paid work. They have taken some of this additional time in
the form of leisure at the end of life, as well as shorter workdays and
workweeks and more holidays during the year. The growth of Social
Security and employer pensions since the 1930s has also facilitated

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earlier retirement, by increasing lifetime wealth for the early cohorts
in the Social Security system and by providing income in old age. Even
though earnings were rising from generation to generation, many
individuals might not have saved enough to retire without these sources
of income. For these reasons the average length of retirement has risen
faster than the average male life expectancy at age 55; hence, the
average male retirement age has fallen.

RECENT CHANGES IN THE LABOR FORCE PARTICIPATION OF OLDER MEN

There are signs that this long-term trend toward earlier retirement
may have abated. Since the mid-1980s the decline in labor force
participation rates for men in the older age groups has leveled off
(Charts 4-4 and 4-6). Other evidence indicates that an increasing
proportion of male pension recipients are continuing to work. For
example, in March 1984, 37 percent of men aged 55-61 who had received
pension income in the previous year were working. By March 1993 this
number had climbed to 49 percent.
Rather than withdrawing from the labor force completely, many older
men are leaving long-term career jobs but continuing to work, often part
time or part year. Many are becoming self-employed. Chart 4-7 shows, for
example, that between 1985 and 1997 the fraction of men aged 60-61 who
worked full time, year round declined from 55.1 percent to 51.8 percent,
while the fraction working part time increased from 5.7 percent to 10.4
percent. Increases in part-time work also occurred among men in other
age groups. In 1997, 16 percent of employed men aged 55-64 and 30
percent of those 65 and over were self-employed.
The use of ``bridge jobs'' between a full-time career and complete
retirement is not a new phenomenon. Evidence from the 1970s indicates
that even then about a quarter of older workers took such transitional
jobs. More recent evidence suggests that a somewhat higher percentage
may be taking such jobs since 1985.
What accounts for the apparent stalling of the decline in male labor
force participation at older ages? It is not yet clear whether the
leveling off since the mid-1980s is a short-term, cyclical phenomenon or
a new long-term pattern. And in any case, older men's hours of work are
still falling, even if the percentage of older men working is not,
because of the shift from full-time to part-time work seen in Chart 4-7.
The recent increase in work by pensioners may stem from a need for
income by those who were displaced during the recession of 1990-91. Some
elderly persons cannot afford full-time leisure, but can finance part-
time leisure by working part time. Pension recipients' need for income
may also have grown in recent years because of rising health care costs.
Not only have these costs risen in general, but many employers have
stopped providing health insurance to their retirees or have reduced
their benefits, as discussed below. The increase in early retirement

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buyouts may also have contributed to increased work by pensioners. More
workers now than in the past are able to spend their pension funds for
other purposes, in advance of or at retirement. The shift to defined-
contribution pension plans (discussed below) means that benefits are
more often received in the form of a lump-sum distribution upon
termination of a job, instead of as an annuity, as is typically the case
in defined-benefit plans. Many workers spend these lump sums instead of
rolling them over into another retirement account, thus reducing the
funds available to them in retirement.
The rise in work among older persons may also be related to changes
in the demand for labor. Employers may be becoming more willing to hire
older workers, as the ``baby bust'' that followed the baby boom leads to
labor shortages. Since 1980 the part-time wages of older men have risen
relative to those of younger men. This has made part-time work more
attractive to retirees.
If the long-term decline in the labor force participation rate among
older men has indeed run its course, it could indicate a limit to the
desire for more years of complete leisure at the end of life. Older
people may want to continue using their skills, or to try something new,
when they leave a career job while still relatively young and healthy
(and to earn some income in the process). The growth of the service
sector, where jobs are less physically demanding and schedules more
flexible than in manufacturing, makes work at older ages more attractive
today than in the past. Changes in pensions and Social Security rules,
discussed below, have also removed many of the incentives to retire
abruptly and completely.
If rising lifetime wages have been driving the long-term decline in
labor supply of older men, we might expect that supply to level off in
the coming decade, as the cohorts born after 1945, who came of age as
wages stagnated in the 1970s, start turning 55. In other words, not only
may their labor force participation rates remain more or less constant,
but so may the share of these workers working full time, year round.
Alternatively, an increase in labor force participation may combine with
an increase in part-time, part-year work. Much will depend on employers'
demand for older workers, as reflected in the wages, fringe benefits,
and working conditions offered to them, and on the incentives built into
pension and Social Security rules--pension incentives being a reflection
of employers' demand for older workers.

INFLUENCES ON THE TIMING OF RETIREMENT

What factors enter into a worker's decision to retire sooner rather
than later? Among the possible considerations are changes in wages and
other compensation as one grows older, the structure of employer
pensions and Social Security, the worker's health and the availability
of health insurance coverage, and the influence of prevailing social
norms. Although the effect of each factor cannot be quantified
precisely, all play a role in the retirement decision.

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Compensation
Wages on a given job do not tend to decline with age, nor should
they be expected to: there is little evidence that productivity declines
with age per se, in the absence of disability. Although clinical tests
have found that manual dexterity declines with age, other skills
improve, and older workers develop ways to compensate for whatever skill
losses they do suffer. Wages do decline when older workers change jobs,
but one cannot infer from this that age alone reduces productivity.
Lower wages following a job change may be due to the loss of ``firm-
specific human capital''--such as seniority, knowledge of the
organization, working relationships, or goodwill gained in the former
workplace. It may also reflect the worker's choice to move to a position
entailing less responsibility or less strenuous or stressful working
conditions. Nevertheless, older workers who lose their jobs may opt to
retire rather than accept the wage reduction that may accompany a job
change.

The Availability of Social Security and Employer Pensions

The structure of Social Security and employer pensions may also
influence the exact timing of labor force withdrawal. Certain Social
Security rules (Box 4-2) create an incentive for many people to retire
at age 62, the earliest age at which benefits are available for persons
without disabilities. This is evident in the large drop in labor force
participation of both men and women at age 62 (Charts 4-5 and 4-6) and
in the spike in retirements among men at that age that has appeared
since the mid-1960s, after early benefits were made available to men in
1961 (Chart 4-8).
Social Security has a number of conflicting effects on work
incentives. On the one hand, the combined Social Security and Medicare
payroll tax of 15.3 percent lowers the net wage, which by itself would
tend to discourage work. On the other hand, more years of work could
increase future benefits for some who have had years with little or no
earnings, because substituting years of higher earnings raises one's
average monthly earnings in the Social Security benefit formula. Future
benefits are a form of deferred compensation, and increasing them tends
to encourage work.
Apart from these features, the present value of expected Social
Security benefits does not change for the average person, regardless of
whether he or she begins to receive Social Security benefits at age 62
or at the normal retirement age (NRA). This is because the benefit
increases by 8.3 percent per year that it is deferred (up to age 65),
which is actuarially fair for a person with average life expectancy, and
better than fair for someone with longer than average life expectancy.
However, not everyone is average; many may not expect to live that long.
For them, Social Security wealth decreases the longer they postpone
benefits beyond age 62. This creates an incentive to begin taking
benefits at 62 rather than later, for workers whose life expectancy is
lower than the average.

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Box 4-2.--Social Security Rules

The old-age, survivors, and disability insurance program of the
Social Security system is designed to replace a portion of earnings lost
because of retirement, disability, or death. It is financed by a
dedicated tax of 12.4 percent on earnings in covered jobs, up to a
maximum in 1999 of $72,600. That maximum is indexed each year to changes
in the average wage. Formally, half the tax is levied directly on the
employer, and half on the employee through payroll withholding, but it
is generally agreed that, in an economic sense, the burden of the tax
falls entirely on the worker. Self-employed workers pay the full tax.
Retirement benefits are based on a person's lifetime average
indexed monthly earnings (AIME; the indexing reflects increases in
national average wages) in covered employment. Only earnings up to the
maximum taxable earnings in each year are counted. Before earnings are
averaged, a certain number of years with the lowest (or zero) indexed
earnings are dropped. The monthly benefit payable at the normal
retirement age (called the primary insurance amount, or PIA) is
calculated according to a progressive formula in which the replacement
rate (the PIA as a percentage of average lifetime earnings) falls as
lifetime earnings rise. Benefits are indexed to the consumer price
index, and therefore have risen more slowly than average wages in the
past two decades.
The normal retirement age (NRA) is the age at which one becomes
eligible for a full retirement benefit. The NRA is currently 65 but is
scheduled to rise gradually to 67, beginning with workers who will reach
age 62 in the year 2000. Retirees may, however, begin receiving a
permanently lower benefit as early as age 62. This minimum age for
receiving benefits will remain at 62 even as the NRA rises. The benefit
reduction is calculated to be actuarially fair (that is, it preserves
the present value of expected benefits for a person with average life
expectancy).
Between ages 62 and 70, receipt of both normal and actuarially
reduced benefits is subject to a retirement earnings test. For persons
below the NRA the annual benefit is reduced by $1 for every $2 of annual
earnings above a certain exempt amount ($9,600 in 1999). For those
between the NRA and age 70 the reduction is $1 for every $3 of annual
earnings above a higher exempt amount ($15,500 in 1999). These exempt
amounts are scheduled to increase in the future, and the President has
proposed that this earnings test be eliminated entirely.
Persons who begin receiving retirement benefits before reaching
the NRA and then earn more than the exempt amount, so that their
benefits are reduced or completely withheld for a given

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Box 4-2.--continued

month because of the earnings test, receive an actuarially fair
increase in benefits when they reach the NRA. Thus, benefits lost are
recovered later. Moreover, earnings from age 62 up to the NRA are
considered in the AIME and may well increase the benefit one receives at
the NRA. On the other hand, workers continue to pay the Social Security
payroll tax, as well as income and other payroll taxes, as long as they
work. From the NRA on, postponed benefits are increased by only 5.5
percent per year (for persons who reach age 65 in 1998-99), which is
less than actuarially fair. However, this adjustment for delayed
retirement is being gradually increased, in a process that began in 1990
and will continue until cohorts reaching the NRA in 2009 and after get
an actuarially fair 8 percent per year for postponing benefits, up to
age 70.
Those who discount future income at a higher rate than 8.3 percent
may also want to start taking their Social Security benefits early. In
particular, they may have a strong preference for current over future
income because they are unusually ``present oriented'' or risk averse.
Also, those who want to receive their Social Security benefits before
the NRA need not leave the labor force entirely to do so. They can
receive their full benefit as long as they keep their earnings under the
exempt amount (see Box 4-2). However, part-time jobs are not always


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available with the same hourly pay, benefits, and working conditions as
full-time jobs, so that many may prefer to stop working completely
rather than take a part-time job. Other individuals may wish to retire
or work part time even before age 62, but cannot yet collect any Social
Security benefits and do not have sufficient savings and pension income
to live on. Because future Social Security income cannot be used as
collateral for a loan, this creates an incentive to continue working
until age 62. All of these considerations help to explain the spike in
retirements at that age.
The fact that Social Security benefits deferred beyond age 65 are
increased by only 5.5 percent per year (for workers aged 65 in 1998-99)
means that Social Security wealth declines for a worker with life
expectancy equal to or lower than the average who continues to earn more
than the exempt amount beyond that age. As recently as 1989, the
increase was only 3 percent per year. (See Box 4-2 for an explanation of
this phased-in increase in benefits deferred beyond the NRA.) This
provision has acted like an additional tax on earnings above the exempt
amount that kicks in at age 65. Although the exempt amount is higher at
ages above the NRA than below it, good part-time jobs may not be
available for workers over age 65. The decline in Social Security wealth
for persons whose earnings exceed the exempt amount at ages 65 and above
has provided a special incentive to retire at that age, which is
reflected in another drop in labor force participation and a spike in
retirements at age 65 (Charts 4-5, 4-6, and 4-8). The rules governing
private pension and Medicare benefits, as well as other social factors,
also create incentives to retire at 65, as discussed elsewhere in this
chapter.
Because the Social Security rules do not vary across persons in a
given age group, it has been difficult to measure Social Security's
effect on labor supply separately from other factors. One study used
data for age groups that were subject to different exempt amounts from
just before and after changes in the earnings test rules. The study
found that the earnings of a substantial number of workers--over 20
percent of male workers aged 67-69, and nearly 10 percent of those aged
63-64--were clustered within $1,000 below the exempt amount. The cluster
moved when the exempt amount moved. This study estimated that the effect
of the earnings test is to reduce the average annual working hours of
male workers aged 65-69 by about 4 percent. Only 28 percent of men (and
18 percent of women) in this age group are currently in the labor force,
but more might seek jobs if the earnings test were completely
eliminated, as the President has proposed.
In recent years the most common age for starting Social Security
benefits has shifted from 65 to 62. Part of the explanation may be the
continuing increase in lifetime income, which allows recent cohorts to
retire earlier. Social norms may also be shifting, making it more

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acceptable for men to be idle before age 65. The decisions in 1956 and
1961 to make Social Security benefits available at 62 for women and men,
respectively, may have both reinforced and expressed such a change in
norms--in a democratic society, legislation often tends to follow social
norms. The abolition in 1978 of mandatory retirement before age 70 (Box
4-3) may also have removed age 65 as the predominant focus for
retirement planning.

Box 4-3.--Age Discrimination in the Labor Market

The Age Discrimination in Employment Act (ADEA) of 1967 outlawed
age-based employment discrimination against both employees and job
applicants who are 40 years of age or older. Later amendments prohibited
mandatory retirement before the age of 70 (in 1978) and then outlawed
mandatory retirement altogether (in 1986), with a few exceptions. A 1990
amendment prohibited employers from denying benefits to employees
because of age.
The number of age-discrimination charges filed with the Equal
Employment Opportunity Commission (EEOC) has fluctuated over the past
decade between about 14,500 and 19,800 per year. That number remained
fairly constant between 1987 and 1990, increased sharply in the early
1990s (reaching a high of 19,809 in 1993), and then fell substantially
after 1994. In fiscal 1998, 15,191 such charges were filed. Of the
charges filed that year, 12 percent had outcomes favorable to the party
bringing charges.Most of the rest ended either with a ruling by the EEOC
of no reasonable cause or for administrative reasons.
Incentives provided by employer pensions must also be considered in
any effort to explain changing retirement patterns. Twenty years ago,
most employer pensions were of the defined-benefit (DB) type (Box 4-4).
Workers covered by such plans typically had strong incentives to retire
before age 65, as early retirement benefits had a higher actuarial
value. Defined-contribution (DC) plans, including those with 401(k)-like
features, on the other hand, contain no incentives for early retirement,
because pension wealth continues to grow until the funds are withdrawn.
As these plans have become more widespread in the past 20 years, workers
have been less constrained in their choice of retirement age.

Job Characteristics and Job Accommodation

For the elderly as for others, the effect of health problems on the
ability to work, and thus on the decision to work or retire, depends on
several factors. These include the type of job one has, the
opportunities for accommodating health problems, and the opportunities
to switch to

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Box 4-4.--Types of Pension Plans

Under a defined-benefit plan, a worker qualifies for a pension
benefit by working in a covered category (which may exclude certain
types of workers, such as part-timers) for a given number of years. This
period, called the vesting period, is now 5 years for the vast majority
of workers in the private sector. The benefit is then available at a
certain age and is usually calculated by multiplying a given percentage
of final earnings by the number of years of service. About half of
workers with DB pensions are in plans that are integrated with Social
Security; that is, the pension benefit formula reduces the pension
amount to adjust for expected Social Security benefits. Reduced benefits
may be available at an earlier age. These benefits often have a higher
actuarial value than normal retirement benefits, and this produces
strong incentives to retire at a certain age. Most DB plans in the
private sector are insured by the Federal Government (see Box 4-7).
By contrast, defined-contribution plans do not entail age-specific
retirement or work incentives. DC plans are essentially tax-favored
savings accounts to which employers may contribute, sometimes even if
the employee does not also contribute. Examples of DC plans are savings
or thrift plans, deferred profit-sharing plans, money purchase plans,
employee stock ownership plans (ESOPs), and 401(k) arrangements. Benefit
levels in DC plans are not guaranteed and are not federally insured.
Instead, the funds are invested, often at the worker's direction, and
the amount of the eventual retirement benefit depends on the amounts
contributed and on the portfolio's performance over the years. Benefits
are usually paid in a lump sum upon departure from the firm, although
sometimes other options are available. These funds are usually portable;
that is, they may be rolled over tax-free into another pension plan or
an individual retirement account. Because the employer's obligation is
limited to its financial contribution and the plans reduce
administrative costs and enhance flexibility, they are popular with
employers.
Section 401(k) of the tax code allows an employee of a for-profit
firm to contribute a share of his or her cash compensation to a DC plan,
and to defer taxes on both the initial contributions and the investment
returns. Employees of nonprofit organizations, State and local
governments, and Indian tribes can participate in similar tax-deferred
annuity programs. Under most before-tax retirement savings plans, the
employer matches a percentage of contributions, but Section 401(k) does
not require employers to contribute in this manner. This chapter refers
to all plans providing for employee contributions as ``401(k)-type
plans.'' Although 401(k)-type plans are popular DC plans, there are
other types of DC plans that do not provide for tax-deferred employee
contributions (for example, most money purchase pension plans and a
substantial share of profit-sharing plans and ESOPs).

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a less demanding job. There is no consensus on what constitutes a
physically demanding job. One definition considers a job physically
demanding if it entails regularly lifting objects that weigh at least 25
pounds. By this definition the share of older Americans employed in such
jobs has fallen steadily, from 25 percent in 1950 (for those aged 60-64)
to 7 percent in 1990. But other job requirements besides physical
strength may make continuing work difficult for older workers. For
example, about 90 percent of older workers say that their jobs require
good eyesight and intense concentration.
Employers frequently accommodate the health impairments of their
elderly workers. More than half of older workers who develop a new,
health-related job limitation continue to work, and around half of those
report that their employer has made some special accommodation for them.
The most common types of accommodation involve changing the structure of
the job, rather than making new investments in equipment or incurring
other direct employment-related costs. Changes in job structure include
changing the scope of the job (reported by 51 percent of those who have
received accommodation), allowing more breaks and rest (45 percent), and
providing assistance with certain aspects of the job (37 percent).
Although the evidence is limited, accommodation rates appear to be
similar for workers at all levels of education.
The direct cost of accommodating older workers with impairments
appears to be small in most cases, with a median of about $200 per
accommodation; 70 percent of accommodations cost less than $500. These
estimates do not, however, take into account losses in productivity from
changes in job scope and increased assistance from co-workers, nor, on
the other hand, do they consider the cost saving of not having to hire
and train a replacement worker.

Health Insurance and Retirement

Studies have found that the availability of health insurance to
persons under 65 that is not contingent on working--either employer-
provided retirement coverage or Medicare eligibility of a spouse--tends
to increase a worker's likelihood of retiring. Widespread provision of
retiree health benefits by employers may have contributed to the pre-
1985 trend toward retirement before age 65, but its influence has
diminished since then. The magnitude of the response and the role health
insurance has played in retirement trends remain highly uncertain,
however.
Between 1987 and 1996 the share of wage and salary workers aged 55-
64 who were covered by health insurance from a current employer--their
own or a nonelderly family member's--remained constant at 73 percent,
despite increased availability of health insurance from employers.
Although more workers in this age group were offered coverage, the
takeup rate--that is, the fraction of offers accepted by the

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worker--declined. More of these older workers are getting their health
coverage through a spouse's employer, as the share covered by health
insurance from their own main job fell by 2.5 percentage points, to 61.7
percent. The share of employees aged 55-64 who had access to health
insurance coverage through either their own or a family member's job
rose from 78.5 percent to 80.4 percent. However, the share of those with
access who actually were covered by health insurance dropped from 92.8
percent to 90.4 percent, possibly because of the increased cost of
premiums to the worker. Many of the rest had other private or public
health insurance, but the fraction of non-self-employed workers aged 55-
64 who were uninsured increased by almost 3 percentage points, to 12.0
percent in 1996.
Many employers provide health insurance for their retired workers,
although an increasing number are requiring the retiree to share the
cost. In 1993, 45 percent of full-time workers in medium-size and larger
firms had access to health benefits upon retirement that were at least
partly paid for by their employer. This fraction had declined
considerably between 1985 and 1988 but changed little since then.
Virtually all of these workers could get coverage from their employer to
bridge the gap between retirement and eligibility for Medicare at age
65, and some coverage would continue after that for all but a small
percentage. However, the percentage of workers who would have to pay
part of the cost of coverage increased dramatically from 1988 to 1993,
from 46 percent to 61 percent of those offered coverage before age 65,
and by a similar amount for those offered coverage from age 65 on.
Nevertheless, by one estimate the annual employer cost per retiree
soared by 34 percent in real terms between 1988 and 1992 alone, to
$2,760 (in 1992 dollars).
Because a majority of employers do not offer health insurance
coverage to their retirees, and some firms, especially smaller ones, do
not even provide coverage to their active workers, a large and growing
number of 55- to 64-year-olds have no health insurance. The number of
uninsured people in this age group grew by 7 percent in 1997 alone.
Persons in this age group are considerably more at risk of needing
expensive medical care than younger people, and often they cannot obtain
commercial health insurance or find it unaffordable. And unless they are
disabled or poor, they are not eligible for public insurance such as
Medicare or Medicaid. The President has therefore proposed to allow 55-
to 64-year-olds to purchase Medicare coverage (Box 4-5).

UNEMPLOYMENT AND JOB LOSS

Unemployment is less prevalent among the elderly than among younger
workers. In 1998 the unemployment rate among 20- to 24-year-olds was 7.9
percent, the rate for 25- to 54-year-olds was 3.5 percent, and the rate
for 55- to 64-year-olds was lower still at 2.6 percent.

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Box 4-5.--Medicare Reform

The Medicare program, like Social Security, reflects the Nation's
commitment to provide for the needs of its older members, and to support
disabled Americans of all ages. Reforming Medicare to protect its
financial soundness and ensure that it provides high-quality care for
its beneficiaries has been one of the Administration's top priorities.
The President worked to include important Medicare provisions in the
Balanced Budget Act of 1997, which paved the way for an increasingly
broad array of innovative health insurance choices for beneficiaries and
shored up the Medicare trust fund. The President has taken steps to
enroll more lower income seniors in supplemental benefit programs that
provide financial assistance in paying Medicare premiums and other
health care costs not covered by Medicare. The President has also
developed initiatives to provide new preventive care benefits, to assist
beneficiaries whose managed care plans have left the program, and to
reduce Medicare fraud.
Even with these reforms, the aging of the population and the
continuing development of new medical treatments will lead to mounting
cost pressures for the Medicare program in the years ahead. The
President has proposed to reserve 15 percent of the projected Federal
budget surpluses over the next 15 years for the Medicare trust fund,
which would extend the program's solvency from 2008 to 2020. In
addition, with the President's encouragement, the National Bipartisan
Commission on the Future of Medicare was formed to consider reforms to
address the difficult long-term problems facing the program. The
Commission's report, due in March 1999, will be an important next step
toward the Administration's goal of developing a bipartisan agreement
that will preserve and strengthen Medicare for all Americans in the 21st
century.
The rate was slightly higher, at 3.2 percent, for workers 65 and older.
Older workers have historically had lower unemployment rates than
younger workers, and these data show that the current employment
situation for older workers is strong.
In addition to having lower unemployment rates, older workers are
less likely to be displaced (that is, to have lost their job because of
a plant closing, insufficient or slack work, abolition of their position
or shift, or some other similar reason) than are workers in their 20s
and 30s. This has been true in every year since national data on
displacement first became available in 1984. (See Chapter 3 for a
general discussion of displaced workers.) According to the latest
survey, conducted in 1998, the displacement rate (the ratio of workers
displaced anytime in the 3 years prior to the survey to total employment
at the time of the

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survey) was about 13 percent higher for workers aged 25-34 than for
those aged 55-64. The rate of displacement fell from the 1993-95 period
to the 1995-97 period for all age groups. However, the decline was
relatively small among older workers: the displacement rate fell 10
percent among those aged 55-64, compared with 21 percent among those
aged 25-34.
Although the rate of job loss is lower among older than among
younger workers, the cost of being displaced may be higher for workers
in their late 50s and early 60s. Older displaced workers are much more
likely to leave the labor force after job loss. Among workers displaced
in 1995-97, 30 percent of 55- to 64-year-olds and 55 percent of workers
65 and older had left the labor force by 1998, compared with just 9
percent of workers aged 25-54. Presumably many of these older displaced
workers retire following displacement. But among displaced workers who
remain in the labor force, the share who are unemployed is higher among
older workers. In addition, for workers who do find jobs after being
displaced, wage losses are substantially higher among older workers than
among younger ones. Thus, even if displacement is less likely among
older workers, when it does occur it may be more costly.

THE UNPAID CONTRIBUTIONS OF THE ELDERLY

It is not easy to attach a dollar figure to the value of the many
unpaid contributions made by the elderly to the economy and society.
Nevertheless, it is important to acknowledge the wide range of
productive activities in which they are engaged. According to a 1996
survey, 43.5 percent of the population over age 55 volunteered at
nonprofit organizations and for other causes, averaging 4.4 hours per
week per volunteer. Many quite elderly persons are part of this active
corps of volunteers: almost 34 percent of those 75 years old and older
reported volunteering. The settings in which older people volunteer are
both formal and informal. For example, 65 percent of volunteers aged 55
or older reported serving with a religious institution, 22 percent
volunteered with an educational institution, and 37 percent worked
informally in their neighborhoods or towns.
Many older people need ongoing assistance because of functional
limitations or cognitive impairments, yet do not need nursing home care.
Instead they often receive informal care, typically from other elderly
persons, including their spouses and children. This informal caregiving
work is largely hidden, because it is for the most part performed in a
nonpublic setting and is typically unpaid. The work may, however, be
essential to the caregiver's family and to the financial stability of
the household, as formal care arrangements may cause severe financial
strain. The provision of assistance by family members and friends may
also reduce the burden on publicly provided services (see Box 4-1 for a
discussion of long-term care).

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A 1992 survey found that 15.1 million Americans over the age of 55
were providing direct care to sick or disabled family members, friends,
or neighbors. Twenty-eight percent of men and 29 percent of women aged
55 and over were caring for others, as were 22 percent of all persons
aged 75 and over. The typical amount of caregiving was 5 hours per week,
but 2.4 million caregivers spent 18 or more hours per week. And although
the proportions of men and women who were caregivers were close to
equal, the total number of female caregivers was greater because women
outnumber men in the older population.
Grandparents, and even great-grandparents, are important sources of
assistance to families. In some households children reside with a
grandparent; in others one or more grandparents assist parents with
caregiving in various ways. According to the 1992 survey, 14.2 million
Americans over the age of 55 helped take care of their grandchildren or
great-grandchildren.
The Bureau of the Census reports that in 1997, 3.9 million children,
or 5.5 percent of all children, lived in a household maintained by a
grandparent--a 76 percent increase since 1970. There were substantial
increases in the number of households maintained by grandparents, with
or without a parent present. Among children living in households
maintained by grandparents, the greatest increases since 1970 were in
households where one parent also resided. More recently, the number of
grandchildren living with their grandparents without any parents present
has increased most rapidly.
This increase in grandparents' assistance with the care of their
grandchildren parallels the increase in single-parent families, but it
may also be due in part to the increased financial pressures faced by
young married couples, who struggle to meet the demands of careers while
raising children. Grandparents also step in when parents cannot function
adequately because of drug use, mental or physical illness, or
incarceration, or when parents abuse or neglect their children.

THE ECONOMIC WELL-BEING OF THE ELDERLY

By almost any measure, the economic well-being of the elderly has
improved tremendously over the past three decades. Income is the most
widely used measure, but it is only a starting point, because it has
several weaknesses as a measure of well-being. First, people are most
concerned about the goods and services that income can buy--about
consumption, in other words--not income per se. People save in some
periods to finance their consumption in later periods. As a result,
income may be higher or lower in one year than another even though
consumption is similar in both years. This logic suggests that it is
important to consider the consumption of the elderly, which is examined
below. A second weakness of income as a measure of

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well-being is that families have different needs, depending on the
number of people in the family, their ages, where they live, and so on.
Thus, an income that would seem generous to one family might be barely
adequate for another. A third weakness of the income measure is that
some economic goods do not have an easily quantifiable monetary value
and are therefore not recorded as income. Most important for the
elderly, home ownership and medical insurance certainly increase well-
being, yet they are not captured by measuring before-tax money income.
As a result, two families with identical incomes and identical needs
could have very different economic status: one might, for example, own a
valuable home and have generous medical insurance coverage, whereas the
other rents an apartment and has no insurance.
Because of these weaknesses, three other sets of indicators of well-
being are examined here in addition to income: the poverty rate,
indicators of wealth accumulation (including home equity), and
indicators of health status. The poverty rate adjusts differences in
income across families for disparities in family size and composition.
Wealth provides a cushion for people to smooth their consumption over
time and creates a buffer against adversities, such as health problems,
that may require substantial expenditure. Finally, earlier in this
chapter changes in health status and life expectancy were examined,
which are also important measures of well-being.
Most of the national data used to examine families' economic status
are based on surveys of the noninstitutionalized population. This
limitation is not of great importance when examining older workers, or
even all persons over 65--only 5 percent of the elderly live in an
institution (typically a nursing home). However, the proportion of
institutionalized elderly rises sharply with age, to almost one-fourth
of all persons 85 and over. Older persons in institutions typically have
few economic resources and are in poor health. Therefore, findings from
surveys of the noninstitutionalized population will not necessarily
apply to the oldest old. Box 4-6 examines changes in living arrangements
of the elderly during the 20th century, with a focus on widows.

INCOME AND CONSUMPTION

The Three-Legged Stool

Economic security in old age is often described as a three-legged
stool, the legs being Social Security benefits; income from accumulated
assets, including savings and home ownership; and pension income. But
the notion of a stool with three legs of roughly equal size is
misleading. The importance of each source of income varies tremendously
among the elderly--many Americans depend almost entirely on Social
Security, for example. In addition, for many elderly households labor
market earnings provide a fourth leg to the stool. Moreover, the

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Box 4-6.--The Changing Living Arrangements of the Elderly

Through most of history, the family has played an important role
in providing support to the needy elderly. Shared housing can be an
especially important and intensive form of support, and the past century
has seen tremendous changes in living arrangements among the elderly.
These changes have been particularly striking among elderly widows, who
now account for 27 percent of all persons over 65.
The share of elderly widows living alone stayed roughly constant
at a low level--10 to 15 percent--for several decades until about 1940
(Chart 4-9). Between 1940 and 1980, however, that proportion increased
sharply, and the share living with adult children fell. By 1980, 59
percent of elderly widows were living by themselves, and only 22 percent
shared a home with their children. This strong upward trend in widows'
independence ended in 1980: living arrangements in 1990 were similar to
those observed in 1980. It is estimated that rising economic status,
primarily due to wider coverage and more generous benefits from Social
Security, accounted for 62 percent of the increase in the share of
elderly widows living alone between 1940 and 1990. About 9 percent of
the change was explained by a decline in the number of children
available for widows to move in with.
When elderly people have been asked to express their attitudes about
living arrangement options in the event they needed care, 68 percent say
they would like to receive assistance in their own home, and only 20
percent state that they would like to move in with relatives.
Apparently, improvements in widows' economic status have allowed them to
fulfill this desire to live independently. But despite these gains,
poverty remains relatively high among widows (see Table 4-4).
average share of income from each source has changed over time and may
continue to change in the future.
In 1962, before the sharp increases in Social Security benefits of
the late 1960s and early 1970s, Social Security accounted for 31 percent
of income for the elderly and their spouses; asset income accounted for
16 percent, and pension income was 9 percent. Earnings were also
important at 28 percent. The remaining 16 percent of income included
welfare and all other sources of income.
Income from these sources has grown at different rates in the past
30 years (Chart 4-10; income data refer to before-tax money income, the
official Census Bureau definition, unless otherwise noted). The share
provided by Social Security has increased, to 40 percent of income on
average in 1996, whereas pensions and asset income each

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composed about one-fifth of income. The share of income comprised of
labor earnings has declined substantially, as is to be expected given
the decline in elderly labor force participation during this period.
These changes took place during a period when the median incomes of both
married and single elderly persons nearly doubled.
The composition of income looks quite different at different income
levels. Among elderly households in the bottom fifth of the income
distribution in 1996, Social Security accounted, on average, for 81
percent of income, public assistance for 11 percent, and asset income
and pensions for only 3 percent each (Chart 4-11). Clearly, a large
segment of the elderly have saved relatively little for their
retirement. Elderly households in the top quintile of the income
distribution rely fairly evenly on Social Security, asset income,
pensions, and labor market earnings.

Saving Social Security

Social Security plays an important and unique role among the sources
of income for the elderly. As discussed in Chapter 1, it is a family
protection plan as well as a pension system, providing Americans for
more than half a century with income in retirement and protection
against loss of family income due to disability or death. In particular,
by providing a lifetime annuity, it offers a level of income security
difficult to obtain in private markets. Through its special contribution
to the well-being of the elderly, survivors, and the disabled, Social
Security has been an extremely successful social program. Yet the
demographic pressures of population aging,

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[[Page 157]]

mentioned earlier in this chapter and discussed at greater length in the
1997 Economic Report of the President, will require forward-looking
action from policymakers to preserve the program's financial viability
in the first quarter of the next century and beyond. Chapter 1 describes
the President's proposals to do this.

From Defined-Benefit to Defined-Contribution Pension Plans

An important source of income for many elderly is employment-related
pensions. The past 20 years have seen dramatic changes in the prevalence
of the two main types of pension plans. Defined-contribution plans,
including 401(k)-type plans, have gained in popularity as participation
in defined-benefit plans has declined (Table 4-1; see also Box 4-4 for a
discussion of the two types of plans). The portability of DC plans
favors mobility among jobs, and workers' demand for more-portable
benefits may have contributed to the ascendance of these plans. DB plans
are more prevalent in unionized manufacturing firms and in the public
sector, both of which have seen a decline in their share of the work
force, thus contributing to the decline in DB participation rates.
Before passage of the Employee Retirement Income Security Act (ERISA) in
1974 (Box 4-7), employees in DB plans were exposed to the serious risk
that their employers would underfund the plan or divert its funds to
other purposes. Even with the protections afforded by ERISA against
underfunded DB plans, DC plans have become increasingly popular,
suggesting that workers have come to accept the investment risks
inherent in these plans in exchange for their flexibility. Benefits in
DC plans depend on uncertain investment returns, whereas DB retirement
benefits are more certain because they are usually tied to years of
employment according to a known formula. Many workers are in DC plans
that supplement a DB plan, but almost all of the recent growth in DC
participation has been among workers who do not have DB plans.
The growing prevalence of DC, and especially 401(k), plans
represents a major shift of responsibility for providing for retirement
income from the employer to the worker, making the provision of
retirement income more and more like individual (albeit tax-advantaged)
saving. Concomitantly, the trend toward DC plans has shifted certain
risks between employer and worker. Under a DB plan, the nominal benefit
amount is guaranteed at retirement, and the employer bears the risk of
providing this amount. The worker has no control over how the pension
fund is invested. Moreover, a worker's pension is at risk if he or she
changes jobs. Since there typically is no provision for worker
contributions, workers usually receive nothing at all from jobs that end
before the vesting period is completed. Finally, because benefits for
vested employees are determined in nominal terms when employment
terminates, inflation may drastically erode a pension's purchasing power
by the time a separated worker reaches retirement age.

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Most private 401(k)-type DC plans, on the other hand, rely on worker
contributions for at least a portion of benefits. The worker typically
decides how much to contribute and where to invest the funds (within
certain limits). Although workers have greater control over investments
in DC plans, they also bear the risk of variable returns on those
investments, in marked contrast to DB plans. Because there is no vesting
period for employee contributions in either type of plan, they belong to
the worker from the start. Employers often make matching contributions
to 401(k) plans, which belong to the worker once the vesting period is
completed. A job change need not affect the worker's accumulation,
provided the worker leaves the funds in the account or rolls them over
into a new tax-deferred account. However, only a third of those aged 45-
54 in 1993 who had received a lump-sum pension distribution had put it
into a retirement account; fewer than half had put it into any financial
asset. Of those aged 25-34, only 25 percent had put their lump sums into
financial assets, including retirement accounts.
Less wealthy, lower income, and less educated workers tend to be
more risk averse in their investment choices; that is, they tend to
invest in more conservative, fixed-income securities rather than in
stocks. By taking less risk (other than inflation risk), they earn lower
long-run rates of return on average and therefore tend to end up with
smaller accumulations at retirement than do higher income, wealthier

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Box 4-7.--The Federal Role in Employer-Provided Pension Plans

The Employee Retirement Income Security Act of 1974 governs
pension and welfare plans sponsored by private employers. The act covers
both defined-benefit and defined-contribution plans. ERISA was enacted
because of concerns about the private pension system: that too few
employees were receiving or would receive the pensions they had come to
expect; that too many participants were being treated unfairly by plans
and employers; and that existing law was inadequate to deal with these
problems. Title I of the act spells out the protections it provides for
workers and fiduciary standards for employers, trustees, and service
providers. Title II sets forth standards that plans must meet in order
to qualify for favorable tax treatment, and Title III contains
administrative provisions. Title IV, which is carried out by the Pension
Benefit Guaranty Corporation, a Federal agency, regulates employers'
funding of their plans to make sure they set aside sufficient funds to
pay the promised pensions. It also insures vested participants'
pensions, at least up to certain levels, against the eventuality that
the employer cannot pay.
This Administration has worked for continued pension reform to
promote retirement saving. Many of the President's proposed pension
provisions were adopted in the Minimum Wage Increase Act of 1996. That
act expanded pension coverage in several ways. It created a new 401(k)-
type plan for small businesses, with a simple, short form intended to
make it easier for small businesses to provide their workers with
pensions. It made it easier for employers to let new employees
participate in 401(k) plans immediately. It required State and local
government retirement savings plans to be held in trust so that
employees do not lose their savings if the government declares
bankruptcy. It expanded access to 401(k)-type plans to employees of
nonprofit organizations and Indian tribes. And it promoted portability
for veterans by allowing reemployed veterans and their employers to make
up for pension contributions lost during active service.
More recently, the Administration has proposed a number of
initiatives to address concerns about women's pension arrangements. One
proposal would allow time taken under the Family and Medical Leave Act
to count toward eligibility and vesting. For some workers such a
provision could make the difference between receiving or not receiving
credit toward minimum pension vesting requirements for an entire year of
work (a minimum amount of work is required in a given year for it to
count toward the vesting period). Another would address the needs of
widows by requiring

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Box 4-7.--continued

employers to offer an option that pays a survivor benefit to the
nonemployee spouse equal to at least 75 percent of the benefit the
couple received while both were alive, in exchange for a smaller benefit
while both are alive. This option would give the surviving nonemployee
spouse the security of a larger benefit than otherwise, which may better
reflect the cost of living for one person compared with two. This would
improve the protection provided by the Retirement Equity Act of 1984,
which requires that pensions be paid in the form of a joint life annuity
in which the surviving nonemployee spouse receives at least 50 percent
of the benefit received while both spouses were living, unless the
retiree's spouse signs a consent to have the pension paid in some other
form, such as a lump sum or a single life annuity.
individuals with the same contributions, although their return is also
more certain. At least partly because they have lower incomes and less
wealth on average, blacks and women make more conservative investment
choices, and consequently would tend to accumulate even less in a DC
plan that provides for employee-directed investments, compared with
white men, than their lower contributions alone can account for. They
also are more likely to cash out their lump-sum distributions when
changing jobs.
It is important to distinguish risk aversion based on lower income
and wealth from risk aversion based on lack of knowledge and investment
experience. Those who have fewer resources to cushion potential losses
cannot afford to take as much risk as those with more to spare. This is
a perfectly sound reason for avoiding risk. However, if lower income
groups are choosing assets with less risk and correspondingly lower
expected yields out of lack of knowledge, or because they misperceive
the amount of risk involved in higher yielding assets, the policy
implications are different. Of course, income, wealth, education,
experience with investments, and knowledge of investment principles are
correlated with each other. Women also may have less knowledge of
investments because husbands have traditionally taken care of these
financial matters for the family, although this is no doubt changing as
family structure and roles within the family change. There is an urgent
need to educate all workers about investments so that, if they are
managing 401(k) investments, they have a better chance of achieving
their retirement income goals.
Depending on what happens to coverage and participation rates and to
average contributions and rates of return, the DC ``revolution'' could
either increase or reduce the average pension income of older Americans.
But the movement toward DC plans could result in greater

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inequality among retirees who have the same job tenure. Under a DB plan
that bases benefits on pay and years of service and is not integrated
with Social Security (as explained in Box 4-4), the pensions of workers
with the same years of service will differ only in proportion to their
pay. Under a DC plan, however, their pensions will differ according to
the difference in investment returns (compounded) as well as in
proportion to pay. If the difference in returns is positively correlated
with pay, the inequality of retirement income will be magnified.
Moreover, contribution rates may be more unequal in 401(k) plans,
because they are partly or wholly chosen by the employee (subject to
certain rules and dollar limits, which may be especially restrictive for
higher paid employees). In most DB plans, benefit levels are determined
by the employer (also subject to certain rules and limits).
It is difficult to predict the effect of the shift from DB to DC
plans on the average pension incomes of women and minorities relative to
white men. Because women earn less on average than men, and minorities
earn less than whites, the pensions of women and minorities are smaller
on average under either type of plan. The evidence is that, for people
aged 51-61 in 1992, the male-female differential in accumulated pension
wealth from all jobs was smaller in DC than in DB plans, even though the
male-female differential in accumulated pension wealth on the current
job was greater in DC plans (Table 4-2). These data on pension wealth do
not, however, control for possible differences in earnings, job
turnover, and tenure between participants in DC and DB plans.
One might expect gender and racial gaps to be greater in DC plans at
a given date on the workers' current jobs because white men tend to have
longer job tenure than women and blacks. In DC plans, pension benefits
grow exponentially with tenure, because the contributions earn a
compound rate of return, whereas in most DB plans benefits increase only
proportionally with years of service and salary (unless benefits are
integrated with Social Security). A dollar invested each year at 4
percent annual interest is worth $12.48 after 10 years and $30.97 after
20 years. Therefore, at a given date, a worker who has been in a DC plan
for 20 years will have 2.48 times the accumulation of a worker who has
been in the plan for only 10 years, even if they made exactly the same
contribution to their accounts in each year they participated in the
plan. In most DB plans that are not integrated with Social Security, the
worker who separates after 20 years of service would receive only twice
the benefit of an equally paid worker who separates at the same time
after 10 years of service.
However, when pension wealth from all jobs is considered, the gender
and racial gaps may be smaller in DC plans because they do not penalize
job turnover and intermittent labor force participation as much as DB
plans do. This depends crucially, however, on whether the DC funds are
left to grow rather than withdrawn and spent when jobs

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end. And as we have seen, many recipients of lump-sum payments do spend
them rather than roll them over.
DB plans provide benefits in the form of an annuity, which
guarantees an income for life, unless the plan provides, and the
participant elects, a lump-sum payment option. The optional forms of
annuity and lump sum are calculated using a uniform mortality table for
all races and both sexes combined, so that participants do not receive
different monthly benefits simply because of their race or sex. However,
whites (and Hispanics) and women have longer remaining life expectancies
at age 55 than blacks and men, respectively, and so receive the stream
of benefits over a longer period of time, on average.
The accumulation in a DC plan, on the other hand, does not depend on
life expectancy. But participants in DC plans cannot assure themselves a
guaranteed income for life, unless their plan provides a group annuity
option or they purchase an annuity on their own. DC plans thus pose the
risk that the beneficiary will outlive his or her savings. The private
market for annuities is subject to adverse selection, in that those who
expect to live a long time are more likely to purchase annuities, and
this drives up their price. This works to the disadvantage of women in
DC plans, since they are more likely than men to live long enough to run
out of money if they do not have an annuity.
Finally, market forces may cause wages to adjust to differences in
employers' pension costs, so that workers who get more deferred pension
compensation in one type of plan may ``pay'' for this benefit in the
form of lower wages, or their wages may grow more slowly with time on
the job. All of these considerations leave it an open question

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whether minorities and women are likely to be better off relative to
white men in DB or DC pension plans.

Consumption

The economic status of the elderly is ultimately measured by the
standard of living that they enjoy. Elderly households typically spend
less on consumption than younger households (Table 4-3), in part because
the average elderly household has fewer people. But the three largest
expenditure categories for elderly households are the same as those for
younger ones, namely, housing, transportation, and food. As is well
known, health care accounts for a greater share of expenditure for
elderly households than for younger ones: 11.7 percent versus 4.2
percent.

POVERTY

The reductions in poverty among the elderly in recent decades have
been remarkable: in 1970, 25 percent of all persons over 65 were living
in poverty, but in 1997 only 11 percent were poor (Chart 4-12). Much of
this improvement occurred in the early 1970s, in part because of double-
digit percentage increases in Social Security benefits enacted in 1971,
1972, and 1973. But progress has been made since then as well: elderly
poverty has fallen by 28 percent in the last 15 years alone, and since
1993 it has declined by 14 percent.
Many elderly people, however, live just above or just below the
poverty line; relatively small changes in their income could move them

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into or out of poverty. In 1997, 6.4 percent of the elderly were ``near
poor''; that is, their before-tax money income placed them above the
poverty line but below 125 percent of that line. Another 5.9 percent had
incomes below, but at least 75 percent of, the poverty threshold.
The decline in poverty among the elderly has been experienced across
demographic groups: men and women, whites and blacks, younger as well as
older elderly persons, and married as well as single persons (Table 4-
4). In particular, poverty among black elderly persons has fallen from
48.0 percent to 26.0 percent since 1970, while the rate for whites has
fallen from 22.6 percent to 9.0 percent. And poverty among widows has
been reduced by half during the same period, with a decline of almost 3
percentage points between 1993 and 1997.
At the same time, Table 4-4 highlights the tremendous variation in
the income status of the elderly, and the fact that poverty remains high
for several groups. Poverty rates for elderly women are nearly twice as
high as those for elderly men, and 72 percent of all elderly living in
poverty are women (Table 4-5). Widows, who account for roughly half of
all elderly women, have an especially high rate of poverty, at 17.9
percent. The President has proposed to address this problem as part of
the ongoing discussions to save Social Security.

Identifying the Needy Population

Who are the elderly living in poverty? The majority of impoverished
elderly are single--either widowed, divorced, or never married

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(Table 4-5). Just over half (51 percent) are widows or widowers.
Seventy-two percent of the elderly poor are women, compared with only 56
percent of the nonpoor elderly. Although elderly persons from minority
groups are more likely to be in poverty than elderly whites, whites
account for two-thirds of the elderly poor. Finally, as shown in Table
4-4, poverty is more widespread among the oldest old than among younger
elderly persons. However, only 13.7 percent of all elderly persons in
poverty are 85 or older (Table 4-5).

Alternative Measures of Income and Poverty

The income measure above can be broadened to include other factors
that affect well-being, including taxes, noncash benefits (such as food
stamps), and the imputed amount that would have to be paid if homeowners
rented their home. If all of these factors are 

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included, the elderly appear to be in better shape than if these factors
are excluded. Average before-tax income for all households headed by
someone 65 or older was $31,269 in 1997. Adding net capital gains
($1,116, on average) and subtracting taxes ($4,033, on average) leads to
average after-tax income of $28,352. Adding in noncash government
transfers ($153), imputed rent ($4,274), and employer-provided health
insurance ($321) increases the value to $33,100. Benefits that are not
included in this calculation are the values of Medicare and Medicaid,
which are substantial but difficult to determine. These calculations
demonstrate that a broader accounting of income available for
consumption suggests that before-tax cash income underestimates monetary
well-being by an average of a minimum of $1,831 (because Medicare and
Medicaid are not valued), or 5.5 percent.
As described earlier, an alternative measure of well-being is
consumption, or how much people spend on goods and services. It has been
shown that the trends in ``income poverty'' and ``consumption poverty''
are similar: consumption poverty among the elderly was 84 percent
higher, and income poverty 70 percent higher, in 1972-73 than in 1988.

WEALTH

Wealth holdings allow families to maintain consumption when earnings
and income are low. Wealth includes financial assets such as savings
accounts, stocks, bonds, and mutual funds, as well as nonfinancial
assets such as homes, vehicles, and businesses. Table 4-6 reports the
share of families holding each of these types of assets and, for those
holding that asset, its median value as of 1995.
The vast majority of the elderly--over 90 percent--have at least
some assets. Among elderly families holding financial assets, the median
value in 1995 was roughly $20,000. Median values of nonfinancial assets
varied by age: elderly families headed by 65- to 74-year-olds had
greater median nonfinancial assets ($93,500) than did those whose head
was 75 or older ($79,000); the family home was the most important
nonfinancial asset across age groups. Financial wealth is commonly held
in the form of retirement accounts: 35 percent of families headed by a
65- to 74-year-old held such an account, with a median balance of
$28,500. In 1995 fewer than 15 percent of elderly families held mutual
funds outside retirement accounts, although those who did have accounts
had substantial holdings, on average.
Wealth holdings among the elderly vary enormously (Table 4-7). In
1994, 10 percent of all households with a member aged 70 or older had
$162 or less in total wealth (in 1996 dollars), and at least that many
had no financial assets at all. Another 20 percent had no more than $541
in financial assets and less than $30,311 in total wealth. At the same
time, 10 percent had at least $415,622 in total wealth, with at least
$175,341 in financial assets.

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The 1998 Economic Report of the President described in detail the
gaps in earnings and income between races and ethnic groups. However,
these disparities are small relative to the differences in wealth. The
median household income of elderly whites is about twice that of elderly
blacks and Hispanics, but the comparable ratio for wealth is about five
to one. Gaps in holdings of financial assets are even wider. In fact, as
Chart 4-13 shows, median financial wealth for households with a member
70 or older is zero for blacks and Hispanics. This means that over half
of the members of these groups have no financial assets at all; the only
wealth they have consists of their home or other physical assets. This
result holds for those approaching retirement age as well: over half of
households that contained a black or Hispanic person aged 51-61 had no
financial assets in 1992.
In sum, a large share of the elderly have very little wealth, and
what wealth they do have is mostly in the form of housing and other
illiquid assets, not financial assets. At the same time, a significant
share of elderly people have quite large wealth holdings, including
ample financial assets.

ARE OLDER WORKERS SAVING ENOUGH FOR RETIREMENT?

One reason why it is important to know the level of wealth holdings
of older persons is to determine whether they will have enough resources
in retirement. Answering this question is difficult for a

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variety of reasons, including the fact that life expectancy, future
interest rates, streams of income, and needs during retirement are
highly uncertain. Moreover, to address this question one must first
define what one means by ``enough.'' Recent studies have defined
``enough'' as the amount of resources that preretirees need to maintain
their current standard of living throughout retirement. These studies
take into account the fact that the postretirement income needed to
maintain the preretirement standard of living is smaller than the amount
needed prior to retirement.
There is evidence that a significant share of the population
approaching retirement are not saving enough to maintain their
preretirement standard of living. It has been found that persons aged
51-61 in 1992 who have household earnings of $30,000 (the median) would
need to save 18 percent of their income in the years remaining until
retirement, if they wish to retire at age 62 and maintain their
preretirement consumption levels throughout retirement. This 18 percent
is above and beyond the household's automatic contributions to Social
Security and pensions. Postponing retirement to age 65 reduces the
necessary saving rate to 7 percent. Typical actual saving rates for
persons approaching retirement have been estimated at 2 to 5 percent.
These estimates mask substantial variation within the population
approaching retirement. It has been found that roughly 70 percent of
households with persons aged 51-61 need to add to their savings, above
and beyond their automatic contributions to Social Security and
pensions, in order to retire at age 62 and maintain their standard of
living; this estimate decreases to 60 percent if retirement is postponed
to age 65. But by the same token, roughly one-third do not need to add
to their savings to maintain consumption throughout retirement. Not
surprisingly, the saving rate necessary to maintain the preretirement
standard of living is substantially higher for households with less
wealth. Finally, although several theories have been advanced to explain
why so many people have a saving shortfall, the available empirical
evidence is not conclusive.
To help Americans save enough to enjoy a more secure retirement, the
President has proposed to reserve about 12 percent of the projected
unified budget surpluses over the next 15 years--averaging about $35
billion a year--to establish new Universal Savings Accounts (USAs).
Under the proposed plan, the government would provide a flat tax credit
for Americans to put into their USA accounts and additional tax credits
to match a portion of each extra dollar that a person voluntarily puts
into his or her USA account. This plan would provide more help for low-
income workers. These accounts will build on the current private sector
pension system to enable working Americans to build wealth to meet their
retirement needs.