Income of the Aged, 2019

The resources available to people ages 65 and older depend on several factors. For those working full-time, earnings from work can often cover expenses. For those with little or no earnings, income depends on private assets, pensions, Social Security, and welfare and public assistance, and is not always enough to avoid poverty. Despite gaps in the program, Social Security is by far the most important poverty reduction tool in the US. Social Security reduces the age 65 and older poverty rate by more than 30 percentage points. 

The US Social Security Administration (SSA) Income of the Aged Chartbook, 2014 contains several charts and tables that aid in thinking about resources available to people ages 65 and older. In this blog post, I discuss two of my favorite charts from the SSA publication, update the charts for 2019, and create new versions that emphasize the importance of Social Security for disadvantaged groups.

Shares of aggregate income

The SSA chartbook includes a chart (page 17) showing how different income sources contribute to total income for both low- and high-income “aged units”. SSA “aged units” are married couples where at least one partner is age 65 or older and unmarried people ages 65 and older. Aged units are ranked by total income and divided into five equal groups, called quintiles. In 2014, the lowest quintile aged units have total income below $13,500, while the highest quintile aged units have total income above $72,129.

The SSA chart on shares of aggregate income, copied below, shows the importance of Social Security to low-income people ages 65 and older. In 2014, Social Security benefits are 80.7 percent of total income for those in the lowest income quintile, meaning Social Security benefits are more than four of every five dollars received by the group. Cash public assistance and welfare, including Supplemental Security Income, comprise an additional 9.5 percent of total income for the lowest quintile. Those in the highest income quintile also receive Social Security benefits, and the dollar amounts of their individual benefits are often higher than the dollar amounts received by the low-income group. However, the high-income group has high income because of access to other sources of income, such as earnings and pensions.

Using the latest data from the same source, I’ve recreated and updated the above SSA chart for 2019. The story is mostly the same in 2019 as it was in 2014, with a couple differences1. The 2019 quintile limits are higher, meaning overall income has increased; the lowest quintile now captures the fifth of aged units with total income below $15,000 a year, while the highest quintile covers the one-fifth with total income above $89,627. Also, cash public assistance represents a smaller share of income for the lowest quintile in 2019, and asset income provides a larger share of income for the highest quintile. In 2019, Social Security comprises 81.6 percent of total income for the lowest income quintile, compared to 80.7 percent in 2014.

Shares of aggregate income in disadvantaged groups

Total income received by people ages 65 and over, and the sources of this income, both depend heavily on race and ethnicity. Two additional charts showing the shares of aggregate income for Black and Hispanic aged units2 illustrate this point.

Compared to the overall US, the income of Black aged units is much lower at all points of the income distribution; one in five has total income below $10,434 in 2019, and four in five have total income below $54,670. Additionally, Black aged units in the lowest income quintile depend more on cash public assistance, a patchwork of income- and asset-tested welfare programs, including Supplemental Security Income, that fill some of the gaps in Social Security. Among the lowest income quintile of Black aged units, Social Security provides 70 percent of total income.

Additionally, relative to the overall US highest quintile group, the highest quintile of Black aged units have less total income and much less asset income, and depend more heavily on Social Security, earnings, and pensions. Less asset income among Black families is a result of the massive US racial wealth gap. The Federal Reserve reports that the typical White family above age 55 has $260,000 more wealth than the typical Black family in the same age group.

Aged units of Hispanic or Latino origin also have lower income when compared to aged units of any ethnicity. In 2019, one in five Hispanic aged units has total income below $10,128, while four in five have total income below $54,507. Hispanic aged units are relatively less likely to receive Social Security benefits (see chartbook page 11) and depend particularly heavily on income from working. Still, Social Security is nearly 70 percent of income for the lowest quintile of Hispanic or Latino aged units.

Among people ages 65 and older with low income, Social Security provides the vast majority of resources. Yet for many, including the bottom fifth of Black and Hispanic aged units, income is below the US poverty threshold and comes from a patchwork of complicated sources. One way to resolve this is to set the minimum Social Security Old Age benefit to the poverty threshold. Doing so would simplify many older peoples’ lives, increase their income, and eliminate the need for Supplemental Security Income and other public assistance programs. 

Poverty among those ages 65 and older

A 2014 SSA chart shows the poverty rate for subgroups of older people (page 28 and copied below). The chart uses the official poverty measure developed by the SSA in the mid-1960s. The official poverty measure compares pre-tax cash income to a threshold that was initially set to three times a minimal food budget in 1963 and that is adjusted for inflation and by family size. In 2014, ten percent of people ages 65 and older are officially in poverty in the US. An additional 5.2 percent of the age group are considered “near poor” because their total income is between the poverty threshold and 125 percent of the poverty threshold. Poverty rates vary dramatically by group; almost one in five Black people ages 65 and older is in poverty in 2014, with an additional 8.5 percent nearly in poverty.

From 2014 to 2019, poverty fell in the US as more people found jobs and earnings increased. Recreating the above SSA chart for 2019 shows that the poverty rate has fallen among all groups but remains very high, particularly for disadvantaged groups. In 2019, 8.9 percent of people ages 65 and older are in poverty by the official poverty measure, and an additional 4.4 percent are near poverty. The poverty rate of Black people ages 65 and older is 18 percent in 2019, a decrease of only 1.2 percentage points since 2014, despite the unemployment rate for Blacks or African Americans ages 65 and older falling from 7.9 percent in 2014 to 4.6 percent in 2019. Among Hispanics or Latinos ages 65 or older, 17.1 percent are in poverty with an additional eight percent near poverty.

A different measure of poverty

The way poverty is measured in the 2014 SSA chartbook does not take into account some aspects of poverty that disproportionately affect older people in the US. The Supplemental Poverty Measure (SPM) was created in 2009 as a more complete measure of poverty. The SPM identifies whether the cash and non-cash resources that someone has available can meet a poverty threshold that adjusts for inflation and family size as well as additional characteristics such as geography. The SPM also accounts for various expenses, including medical expenses. Medical expenses increase the age 65 and older poverty rate by four percentage points.

The next chart uses the SPM poverty rate instead of the official poverty rate seen in the previous chart. Additionally, the next chart shows the share of each group that is removed from poverty by Social Security, meaning not in poverty specifically because of receiving Social Security benefits. For people ages 65 and older, the SPM poverty rate (12.8 percent) is higher than the official poverty rate (8.9 percent), primarily because the SPM accounts for medical expenses. Among those ages 65 and older in disadvantaged groups, the SPM poverty rate is particularly high. The SPM poverty rate is 21 percent for Black people ages 65 and older and 24.4 percent for people in the age group with Hispanic or Latino origin. 

While old-age poverty is higher than it should be, the importance of Social Security for reducing old-age poverty cannot be overstated. In 2019, despite a booming economy, an additional 31.1 percent of people ages 65 and older would be in poverty if they did not receive Social Security benefits. That is, the SPM poverty rate would be 43.9 percent for those ages 65 and older but instead is 12.8 percent because of Social Security benefits.

Further, more than a third of women ages 65 and older are taken out of poverty by Social Security; the poverty rate for women in the age group is 14 percent instead of 47.5 percent. Perhaps most astoundingly, despite the relatively good economic conditions, more than half of Black and Hispanic people ages 65 and older would be in poverty in 2019 without Social Security benefits. Nearly a third, 32.6 percent, of Black people ages 65 and older are taken out of poverty by Social Security. The figure is slightly less, 29.8 percent, for those of Hispanic of Latino origin.

1 The 2014 and 2019 income categories are not strictly comparable due to a redesign of the survey to better capture pension income. See my calculations

2 The race and ethnicity of a married couple aged unit is defined by the 2014 SSA chartbook as the race and ethnicity of the husband. In the 2019 data, same sex married couples are included, so for these couples I use the race of the older partner or the race of the partner appearing first in the survey if both are the same age.

Wealth and Income

Recently released data from the 2019 Survey of Consumer Finances (SCF) show a highly unequal distribution of wealth in the US, both between and within racial groups. This is not new, but the numbers are always staggering. The typical white family has eight times the wealth of the typical black family. Within racial and ethnic groups, more than eighty percent of wealth is owned by the wealthiest twenty percent of families.

Having wealth is a huge advantage and not having wealth is a huge disadvantage, yet people argue, incorrectly in my view, that wealth statistics are not as important as they seem. I want to respond to some common arguments, which generally revolve around the connection between wealth and income.

Common argument #1: Wealth is not a good predictor of poverty

The basic argument here is that some people with low or negative net worth actually have very high income. Therefore, since poverty is defined based on income, people with low wealth are not necessarily poor. There’s nothing wrong with this argument; because wealth is measured as net worth, assets minus debts, these cases do exist. A recent medical school grad with lots of student debt and few assets will have negative wealth but a very high salary and is unlikely to be in poverty. But these are corner cases. All the argument is saying is that there exist some cases where the relationship between net worth and income falls apart.

Applying this argument to anything other than the specific corner cases is misleading. There is a strong correlation between having low wealth and having low income and nearly all poor people have low wealth. Likewise, few wealthy people are in poverty on an income basis.

More importantly, the argument does not explain differences between demographic groups. We know that the difference between black and white wealth is not in any way compensated for by black people having higher income. Overall, the story of the black-white wealth gap is an assets story, not a student debt story. Black families have substantially fewer assets, substantially less wealth, and substantially less income. We can see this by looking at net worth, financial assets, and pre-tax income:

Common argument #2: Wealth is not a permanent source of income

Again, this is an argument mostly based around corner cases. If someone has equity in their home, they may have some wealth but not necessarily have an income advantage over someone who rents. Stocks might temporarily skip paying dividends because of weak economic conditions. There are even cases where people lose money by having wealth comprised of assets that lose value. The horror.

But the bigger picture here is that assets generally do provide income or utility and having a positive net worth does mean more income when viewed from the aggregate data. I want to illustrate this in two ways. First, the pre-tax income of various groups by their wealth percentile shows a clear relationship between income and wealth. People with more wealth have higher income:

Additionally, if we look at aggregate personal income data for the US in 2019, the overall growth from 2018 is an impressive 6.8 percent after adjusting for inflation. The second largest source of that growth, explaining 1.5 percentage points, is larger payments to property owners in 2019 than in 2018:

I wouldn’t say that wealth is a permanent source of income but neither is labor. We can see this in the above chart from the change in the number of recipients of earnings (labor income). The chart shows that aggregate personal income went up 1.1 percentage points because more people were employed in 2019 than 2018. In other words, a (disproportionately black) portion of the population was still re-entering the labor force a decade after the great recession had ended. And as we’ve seen recently, people lose jobs all the time and sometimes these job losses last for many years, so what is a permanent source of income?

Perhaps a better question is whether wealth is consequential and reliable as a source of income. I’d argue that it is. Various forms of ownership income are equivalent to annualized income of more than $16,000 per person in August, despite the very severe ongoing recession.

Common argument #3: The concentration of wealth is a life cycle story

The following chart is useful for thinking about income and consumption over a person’s life:

(Source)

The argument related to the life cycle story shown in this chart goes something like “wealth is concentrated because of age and reflects peoples’ retirement savings”. People argue that wealth reflects accrued earnings–it comes from the portion of the chart where labor income exceeds consumption. If wealth is simply accrued earnings used for consumption in retirement, then its okay that some (older) people have wealth and other (younger) people don’t (yet).

But the issue here is that large gaps still exist between families in the same age group and other large differences exist in ways that age does not explain. For example, some young people receive inheritance, in-vivo transfers, or other transfers like a car, help with college tuition, or help with a home down payment. Other young people simply do not receive these things. The gap by race is very wide when it comes to these kind of inter-generational transfers–they are much more common among white families than black families.

The accrued earnings story just doesn’t hold up to the data. From the Federal Reserve, “by some estimates bequests and transfers account for at least half of aggregate wealth (Gale and Scholz 1994), have recently averaged 3 percent of total household disposable personal income (Feiveson and Sabelhaus 2018), and account for more of the racial wealth gap than any other demographic or socioeconomic indicator (Hamilton and Darity 2010)”

Also, from 2016 SCF data, a large and growing share of people nearing retirement age (those 55-64) have no or negative wealth outside of home equity, and many also have no equity stake in their home. Social Security payments are the main source of income for a large portion of the retirement-age population and this should be expected to grow as defined benefit pensions plans become more and more rare. The end result of the current system of using private wealth to resolve income and consumption differences in the life cycle is massive gaps between people in access to goods and services at all points of the life cycle.

Should we focus on wealth?

First, if we think about wealth as assets rather than net worth (because the net worth differences between and within racial groups are largely the result of differences in assets), we can easily see the advantage of having money to cushion against an unexpected drop in income or unexpected expense. Black families are less likely to have emergency savings, and those with some savings have less than 1/5th the emergency savings of white families, on average. Black families are also substantially less likely to be able to borrow money from a friend or relative. For these reasons and many others, wealth is important, not just because it can be a source of income.

That said, income is still critically important. A policy focus on full employment, increased worker bargaining power, and compressing the wage distribution would make a huge difference in reducing poverty and reducing income inequality, and eventually, in reducing wealth inequality. But increasing the share of total income that goes to labor won’t solve one major source of inequality and poverty: the unequal distribution of workers in families. Some families contain one or more people who cannot or should not be working (children, students, elderly, persons with disabilities, unpaid caregivers, etc.), while other families do not. This situation is more common than people realize (around half of the country are non-workers during full employment) and is precisely where the welfare state shines. The US could use public ownership of wealth as a supplement to taxes in funding income payments to non-workers. As many countries already demonstrate, such payments can be designed to efficiently solve the inequality caused specifically by the uneven distribution of workers in families.

Importantly, whether the US manages to redirect a portion of its capital income to new welfare programs or not, the US government should make reparation payments to American descendants of slavery. People want to believe that wealth results from accrued earnings because it is a meritocratic story. The accrued earnings of millions of black people were stolen during slavery. Just because the victims died does not mean the wealth wasn’t stolen from their descendants. The theft of these earnings has contributed greatly to the massive racial wealth gap and this gap should be closed through both policies that close the racial income gap and through reparations and increased public ownership of assets.