Lane Kenworthy, The Good Society
May 2021

“Elderly” is commonly defined as age 65 or older. In 1960, the elderly were 9% of America’s population. Today they are about 17%, and their share is expected to continue to rise in coming decades.¹

What challenges do the elderly face? How are we doing in addressing those challenges?

Skip to:

• Income security
• Medical care
• Living arrangements and care
• Lifelong learning
• Happiness
• Summary

INCOME SECURITY

Central to inclusion of the elderly is economic security. A century ago, most older Americans had little or no economic security. Today, thanks to enhanced access to medical care, public income security programs, pension plans, and asset accumulation, their situation is much improved.

Indeed, by some measures the elderly now tend to enjoy at least as much economic security as many other groups. Consider the poverty rate. According to the official government measure, shown in figure 2, in 1960 roughly 35% of elderly Americans were poor, compared to fewer than 20% of working-aged Americans. Sixty years later the poverty rate among the two groups was essentially identical, at around 10%.²

For most Americans, income security in old age rests on some combination of five pillars:

• Social Security and SSI
• Employer-based pension
• Savings
• Homeownership
• Earnings from employment

Social Security has been key to the falling poverty rate among the elderly. Nearly one in three elderly Americans receives 90% or more of their income from Social Security.³ In 1960 the average recipient of Social Security old-age benefits got about $6,000 (in today’s dollars). That average increased steadily over the ensuing decades, reaching $16,000 as of 2016. During this time the share of elderly Americans who receive Social Security expanded from 60% to around 90%.⁴

As figure 3 indicates, with Social Security alone, the income replacement rate for a typical American retiree is modest by the standards of the world’s rich countries.

Social Security is funded in a “pay as you go” fashion: money paid to current recipients comes directly from the payroll taxes paid by current working Americans.⁵ As the large baby boom generation retires, the number of elderly recipients per working-age person will rise, putting pressure on this funding arrangement.⁶ But contrary to frequent assertions by political pundits and journalists, Social Security isn’t in crisis. As figure 4 indicates, the current projection is that its cost will rise by about 1% of GDP between now and 2035 and remain flat thereafter. This can be paid for via some relatively minor changes, such as an increase in the share of earnings subject to the payroll tax (as of 2020, earnings above $137,700 are exempt from the tax), a small increase in the payroll tax rate, a small increase in the retirement age, and/or a reduction in the rate of benefit increase over time.⁷

Around 5% of elderly Americans receive money from the Supplemental Security Income (SSI) program. SSI provides cash assistance to low-income, low-asset persons who are elderly, disabled, or blind. The program began in 1974. Maximum yearly benefit levels are approximately $8,500 for an individual and $13,000 for a couple. Nearly all of the states supplement these amounts. A significant limitation of SSI for the elderly is its low take-up rate; only slightly more than half of those who are eligible actually receive the benefit.⁸

The second retirement income security pillar is employment-based pensions. The share of workers who participate in an employer pension plan has remained steady in recent decades at around 45%,⁹ but the type of plan has changed dramatically. In the late 1980s, 68% of Americans with an employer pension plan had a defined-benefit plan with their company. By 2016 that share had shrunk to 28%. These have been replaced by defined-contribution plans such as 401(k)s. Among those with a pension, defined-contribution plans jumped from 53% to 83%.¹⁰

Defined-contribution plans have some advantages: they’re portable across employers, the employee has some say in how the money is invested, and a person in financial difficulty prior to retirement age can withdraw some or all of the money, though there is a tax penalty for doing so.¹¹ And pension wealth (as a share of wages and salaries) in defined-contribution plans has increased enough to offset the fall in pension wealth in defined-benefit plans.¹² The problem is likely to be in the uneven distribution. Some employees and employers may not contribute enough to defined-contribution plans or keep the money in them long enough.¹³ If an employee doesn’t know about or understand her firm’s program, or if she feels she needs every dollar of her earnings to pay for current expenses, she may go a long time, perhaps even her entire working career, without putting any money into a defined-contribution plan. Because employer contributions usually take the form of matching funds, with the amount put in by the employer pegged to the amount put in by the employee, no employee contribution often means no employer contribution. Moreover, when a person switches employers she or he has a choice to keep the defined-contribution-plan money as is, roll it over into an individual retirement account (IRA), or withdraw it with a tax penalty subtracted. This creates a strong temptation to withdraw some or all of the money, leaving a lot less, and sometimes nothing at all, for the retirement years.

The third pillar of retirement income security is personal savings. It too has weakened. Average household saving as a share of disposable household income fell from 10% in the 1970s to 8% in the 1980s to 5% in the 1990s to 3% in the 2000s.¹⁴ The decline probably was even steeper for households on the lower rungs of the income ladder.

The fourth pillar is homeownership. In an ideal scenario, a person or couple will purchase a home by age 35, taking out a 30-year mortgage loan, and by age 65 the loan will be paid off. Having no mortgage or rent payment sharply reduces expenses during the retirement years. Or the house can be sold (or borrowed against via a “reverse mortgage”) to provide an additional source of income. At age 65, 80% of Americans live in a home they own, though not all have fully paid off their mortgage. At age 85, 70% still do. Median net equity among elderly homeowners is $100,000.¹⁵

The sharp increase in home prices during the housing bubble from the mid-1990s to the mid-2000s boosted the assets of many middle-class homeowners in or near retirement. But with the bursting of the bubble, all or much or that gain has disappeared for many of them.¹⁶

The fifth and final retirement income security pillar is earnings from employment. Figure 5 shows the trend in the employment rate among Americans age 65 and over. The rate dropped steadily in the 1960s, 1970s, and 1980s. Since the late 1990s it has slowly but steadily risen.¹⁷ Many work part-time.¹⁸

What’s the bottom line on retirement income security? The best information on current and future income trends is from the Social Security Administration’s MINT (Modeling Income in the Near Term) projections.¹⁹ Figure 6 shows projected income for retirement-age households in the bottom fifth of incomes (“Q1”) and in the next fifth (“Q2”). Among households in the bottom fifth, median income for those age 65 in 2007 was $11,000. This is projected to rise to $14,000 in 2037. Among households in the lower-middle fifth, the projection is for a rise from $24,000 in 2007 to $28,000 in 2037. So the best available estimates suggest that despite falling savings and the shift from defined-benefit to defined-contribution employer pensions, the incomes of elderly Americans aren’t likely to decline in absolute terms. Instead, they will increase.²⁰

On the other hand, figure 6 also shows that these income levels are projected to rise less rapidly than GDP per capita.²¹ Retirement incomes for many ordinary Americans will, in other words, fall farther and farther behind growth of the economy. Over the long run, that’s a potentially worrisome trend.

How can we do better? Social Security benefits could be increased.²² A modest, gradual rise over time is appropriate as the economy grows, and it surely is affordable. But this is only a partial solution. We need one or more of the other retirement income security pillars to increase as well.

We could try to encourage more saving. But previous attempts, such as offering tax advantages (IRAs), have had little impact on the savings behavior of most ordinary Americans.²³

We need to shore up employment-based pensions. There is no going back to the defined-benefit past; for most Americans, a pension in the future will be a defined-contribution one. Rather than allow Americans to contribute to defined-contribution plans if they have a steady job and if their employer offers a plan and if they know about it and if they feel they can afford to put some of their earnings in it, we could make contributing the default option and make it available to everyone. Employers that have an existing plan could continue it, but they would have to automatically enroll all employees and deduct a portion of earnings unless the employee elects to opt out. Employees who lack access to an employer plan would be automatically enrolled in a new universal retirement fund, and those who lack an employer match would be eligible for matching contributions from the government.²⁴

In the absence of federal government action along these lines, a few states have created their own programs. California’s Secure Choice Retirement Savings Program, the largest of these, requires firms with five or more employees to enroll them if it doesn’t offer a company-sponsored pension program. The program contributes 3% of each paycheck, unless an employee chooses to opt out. But there is no matching contribution from the employer or the state.²⁵

We also could facilitate greater employment among the elderly. Later retirement isn’t a good option for everyone, of course, especially those who have spent most of their working lives in stressful or physically taxing jobs. But for those who can manage it, it is doubly beneficial: it provides an additional source of income, and it allows people to delay receipt of Social Security, which in turn increases the benefit level they receive.

MEDICAL CARE

Medical care is another key determinant of economic security and inclusion in old age. Health insurance is a must, as medical care is too expensive to be purchased out of pocket — particularly for the elderly, who tend to need more expensive care and have less income than working-aged adults. Nearly all elderly Americans are enrolled in Medicare.²⁶ Most also have additional supplementary insurance for medical expenses that Medicare doesn’t cover.²⁷ For most, the cost of Medicare enrollment is about $1,200 per year.²⁸

For elderly Americans, Medicare pays, on average, about 65% of total medical expenses. Medicaid and supplemental health insurance plans pay about 20%. The remaining 15% comes from out-of-pocket payments.²⁹ The elderly spend an average of 15% of their income on medical expenses.³⁰

Medicare is a very popular program. And it has proven effective at helping to ensure economic security among older Americans. Indeed, it has largely eliminated financial hardship due to the cost of medical treatment among the elderly. However, Medicare also is expensive. Its cost has risen from 0.5% of GDP in 1970 to 3.7% in 2018, and as figure 7 shows, the cost is projected to continue increasing until it reaches about 6%. About half of this rise is a product of the same demographic development — the baby boom generation reaching retirement age — that is responsible for the coming increase in Social Security expenditures. The other half of the projected rise is a function of the increasing cost of healthcare in general.³¹

In all likelihood, the projected increase in Medicare costs is affordable. Continued reduction in the cost of food and manufactured goods will free up money we as a society can use to pay for medical care.³²

There also are grounds for optimism about our ability to reduce the rate of growth of Medicare expenditures, and to do so in a way that maintains or improves economic security for recipients. (Proposals for Medicare reform that don’t meet this criterion include increasing the age of Medicare eligibility and shifting to “premium support.”³³) Healthcare experts largely agree that the problem owes to excessive treatment and overpricing by medical care providers, and we have begun to address this.³⁴ Since the late 1990s Medicare costs per recipient have risen less rapidly than costs for those with private insurance. And the 2010 Affordable Care Act created a number of mechanisms to slow the growth of Medicare costs. It reduces Medicare “overpayments” (certain types of payments to providers and subsidies to private insurers that offer Medicare Advantage Plans). It encourages a switch in payment from “fee-for-service” to “accountable care,” whereby physicians and hospitals are paid according to their effectiveness in delivering successful outcomes while controlling costs. It penalizes hospitals if too many of their patients end up being readmitted soon after release. Early results are encouraging: expenditures per Medicare beneficiary have been flat in recent years. The Affordable Care Act also authorized creation of an Independent Medicare Advisory Board (IPAB), which will be able to limit the rate of growth in Medicare spending without needing approval by Congress.³⁵

Medical care includes much more than access to doctors and hospitals. There are a number of assistive technologies that can facilitate better living among the elderly, and in the future there will be more, as the Stanford Center on Longevity notes in a recent report³⁶:

“In the future, older adults will be able to remain mobile longer than they can now, with the help of thin, wearable exoskeletons that let them walk and run with enhanced strength, much as e-bike riders power uphill without huffing and puffing. Unlike wheelchairs, these devices can be tuned to provide enough support to maintain normal activities while still allowing muscles to exercise to their capacity, preserving muscle mass…. 3D-printed braces and pads, customized to the individual, will help prevent injury. Sleep may be enhanced by unobtrusive monitors that sense disturbances and adjust temperature and light. Later in life, remedies for age-related issues will be built into clothing, cars, and homes, much as driver-assist technologies are already making cars safer with blind spot indicators and automatic braking…. Combined, these opportunities have the potential to redefine old age from a period associated with illness, frailty, and dependence into yet another life stage with potential for vitality, independence, and continued contributions to society.”

LIVING ARRANGEMENTS AND CARE

Many older persons want independence but also social connections and community. Quite a few need help with daily activities.³⁷ What type of living arrangement best promotes these goals?³⁸

Historically, the most common arrangement has been for elderly persons to live with their children or other members of their extended family. This remains the norm in Japan and some southern European countries.

In many countries a majority of elderly people say they would prefer to to live in their own home or apartment, and many do so.³⁹ Spouses, partners, children, or other family members can help older persons who need assistance with day-to-day activities. But scheduling obstacles or partner frailties mean some will need additional help.

Paid in-home assistance and elderly “daycare” can help to increase care and community for those living in their own home or with extended family. Nurses can come to the home to provide assistance for several hours, throughout the day, or round-the-clock if needed. And elderly persons can be transported occasionally or every day to centers or other places where they are able to meet and socialize with others.

A third option is an elderly institutional facility. There are three main types. Independent living communities are groups of elderly persons who need little or no help. Assisted living facilities provide help with everyday tasks, including eating, dressing, bathing, and using the bathroom, but they don’t offer full-time nursing care. Nursing homes provide full care. Some facilities combine these.

Sweden’s approach to elder care is widely considered a model.⁴⁰ Elderly Swedes who need assistance may get help from family members, but they can instead or in addition receive publicly-funded services. About 17% do so: 5% live in an elderly institution, and another 12% receive “home-help services” in their home. Decisions about types and levels of provision are made by counties and municipalities. Providers of institutional care and in-home help are both public and private. There is a co-payment, but it is capped at about $200 per month. Sweden spends a little over 3% of its GDP on long-term care.

In the United States, government support for elder care is more limited.⁴¹ An estimated 7 million elderly Americans, 14% of the elderly population, need help with everyday activities. The average yearly cost is about $30,000 for a home-health aide (30 hours per week, 50 weeks per year, $20 per hour), $45,000 for a room in an assisted living center, and $85,000 for a room in a nursing home. Medicaid is the principal government provider of funding for long-term elder care. (Medicare doesn’t cover long-term care.) It funds mainly nursing home care and in-home care, though some money is available for care in assisted-living facilities. Medicaid has a stiff asset limit, which often forces recipients to spend down most of their assets in order to qualify. And Medicaid covers a comparatively small share of those who need support. As figures 8 and 9 show, fewer elderly persons receive paid long-term care in the US than in quite a few other rich nations. Public expenditure on long-term care in the US amounts to just 0.75% of GDP.

LIFELONG LEARNING

Our standard model of education is that it occurs during the first two or three decades of life and then ends. But there is no need for that to be the case. Many elderly persons, particularly those who are retired from paid employment, are likely to be interested in additional education, perhaps through formal schooling.⁴²

Indeed, some will want to be in or near an active learning environment.⁴³ This suggests that colleges ought to pursue the integration of “nontraditional” students. Some have begun to do so, often through “extension” programs, but this process is only in its infancy.

HAPPINESS

We have a range of seemingly contradictory images of life after age 64: relaxed, carefree, convivial but also fragile, decrepit, and lonely. In actuality, old age is as diverse and multifaceted as these stereotypes suggest.⁴⁴

For most people, health is in decline by this point in life. Yet that doesn’t mean health is bad; many elderly persons are in fairly good shape in health terms.⁴⁵

According to one study, 20% of elderly in OECD countries report having no contact with friends, a higher share than among other age groups.⁴⁶ This suggests loneliness may be a problem of concern among the elderly.

In the United States, Gallup asks a variety of questions about relationships with friends and family, personal time, and receipt of encouragement and support. They use the responses to create a composite indicator of “social well-being.” They then classify respondents as either thriving (well-being that is strong and consistent), struggling (well-being that is moderate or inconsistent), or suffering (well-being that is low and inconsistent). Among Americans aged 18-29, 30-44, and 45-64, the share who are thriving on social well-being was 36-38% as of 2014. Among the elderly, the share was 53%.⁴⁷

Survey data suggest that the elderly tend to be less worried and stressed than younger people. In 2015, about 20% of elderly Americans said they felt stressed or worried, compared to 30-40% of those aged 18 to 64.⁴⁸

Since the early 1970s, the General Social Survey (GSS) has asked American adults “Taken all together, how would you say things are these days — would you say that you are very happy, pretty happy, or not too happy?” Figure 10 shows that the share of elderly Americans who say they are “not too happy” has been virtually identical to the share among the nonelderly throughout this period.

Other indicators point to a similar conclusion. Responses to Gallup surveys suggest that elderly Americans are no more likely than their nonelderly counterparts to be struggling or suffering along various dimensions of well-being, from purpose (having an inspiring leader, daily activity, goals, strengths) to financial (standard of living, ability to afford basic necessities, financial worry) to social (see above) to community (community pride, involvement, safety and security).⁴⁹

SUMMARY

Economic security and inclusion have improved immensely for America’s elderly over the past century. Three significant challenges loom: ensuring that the incomes of elderly Americans in the bottom half don’t fall farther and farther behind the growth of the economy, slowing the rise in Medicare costs, and transitioning to affordable living arrangements that combine independence with community.