The Myth of the Wealthy Elderly

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Dean Baker

Dean Baker is co-director of the Center for Economic and Policy Research

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November 14th, 2011 9:14 PM

The Myth of the Wealthy Elderly

The austerity gang seeking cuts to Social Security and Medicare have been vigorously promoting the myth that the elderly are an especially affluent and privileged group. Their argument is that because of their relative affluence, cuts to the programs upon which they depend is a simple matter of fairness. There were two reports released last week that call this view into question.

The first was a report from the Census Bureau that used a new experimental poverty index. This index differed from the official measure in several ways; most importantly, it includes the value of government noncash benefits, like food stamps. It also adjusts for differences in costs by area and takes account of differences in health spending by age.

While these new measures showed a slightly higher overall poverty rate, the most striking difference between the new measure and the official measure was the rise in the poverty rate among the elderly. Using the official measure, the poverty rate for the elderly is somewhat lower than for the adult population as a whole, 9 percent for the elderly compared to 14 percent for the nonelderly adult population. However with the new measure, the poverty rate for the elderly jumps to 14 percent, compared to 13 percent for nonelderly adults.

By this higher measure, we have not been nearly as successful in reducing poverty among the elderly as we had believed. While Social Security has done much to ensure retirees an income above the poverty line, the rising cost of health care expenses not covered by Medicare has been an important force operating in the opposite direction.

The other report suggests that this situation could get worse in the years ahead. The Pew Research Center released a study on wealth by age cohort. While many observers (including me) focused on the change in wealth over the last 25 years, what is perhaps more striking about this study is the levels of wealth it reported.

The report showed that the median wealth for a household over age 65 is $170,500. This measure includes everything that they own, including equity in their home. With the median house selling for roughly $170,000, this study implies that the typical household over age 65 would essentially have enough money to pay off their mortgage. They would then have nothing else to live on except their Social Security.

The situation looks even worse for the near elderly: the cohorts between the ages of 55 to 64. (Wealth typically peaks in these years, so these people are unlikely to have more wealth when they cross age 65.) The median wealth for this group was reported as $162,000. Using the Pew findings, the typical household in the 55- to 64-year-old cohort would fall 5 percent short of the money needed to pay off the mortgage on the median home.

Alternatively, if they were to use this wealth to buy an annuity at age 65, it would be sufficient to get them an annuity of roughly $10,000 a year or just over $800 a month. This would supplement Social Security income that comes to less than $1,200 a month for a typical worker. The monthly premium for Medicare Part B is $100, which would leave $1,100 from a monthly Social Security check for a typical retiree.

Note that this calculation assumes that they have no equity in their home, so they would either be paying rent or still paying off a mortgage out of this money. It is also worth remembering that the Medicare premium is projected to rise considerably more than the cost of living each year. This means that as retirees age, rising Medicare premiums will be reducing the buying power of their Social Security check each year. And this is the median; half of all seniors will have less income than this to support themselves.

This is the group that the Very Serious People in Washington want to target for their deficit reduction. While the Very Serious People debate whether people who earn $250,000 a year are actually rich when it comes to restoring the tax rates of the 1990s, they somehow think that seniors with incomes under $30,000 a year must sacrifice to balance the budget. There is a logic here, but it ain't pretty.