Social security and the evolution of elderly poverty

One of the most striking trends in elderly well-being in the twentieth century was the dramatic decline in poverty among the elderly. The official poverty rate of those sixty-five years and older was 35 percent in 1960, more than twice that of the non-elderly (those aged eighteen to sixty-four), but by 1995 it had fallen to 10 percent, and to below that for the non-elderly. Eugene Smolensky, Sheldon Danziger, and Peter Gottschalk (1988) found similar steep declines in elderly poverty going back to 1939. This poverty reduction among the elderly exceeded that for any other group in society. The rapid growth in Social Security benefits in the post-World War II period is often cited as a major factor in elderly poverty reduction. This conclusion is based on evidence such as that shown in figure 6.1, which plots both the elderly poverty rate and per-capita Social Security program expenditures over time (the figure is rescaled so that both series fit on the same graph). There is a striking negative association between these series: elderly poverty declined rapidly as the Social Security program grew quickly in the 1960s and 1970s, and then declined more slowly as program growth slowed in the 1980s and 1990s. One concern with potential reforms to the Social Security system is that the reduction of elderly poverty rates over the last forty years may be reversed to the extent such changes effectively involve benefit reduction. Our goal in this chapter is to assess the role of Social Security in driving this reduction in elderly poverty. We begin with time-series evidence on the growth in Social Security and the decline in elderly poverty. We consider both absolute and relative measures of elderly poverty, as well as the heterogeneity in the evolution of elderly poverty. We consider two points in particular: first, whether these changes in poverty were reflected equally among the oldest old, who start with much higher poverty rates, and the youngest old; and second, whether the trends were comparable across marital-status groups: the married, divorced, widowed, and never-married. We then assess the causal role of Social Security in explaining these trends. We outline the econometric problems in the previous literature on the impact of Social Security on elderly income poverty and propose an instrumental-variable (IV) procedure to circumvent these difficulties. We then examine the effect on poverty of the large changes in Social Security benefits for cohorts born in the late nineteenth and early twentieth centuries. Of particular interest are the sharp benefit changes for birth cohorts from 1906 through 1926. The early cohorts in this range saw enormous exogenous increases in Social Security benefits, partly because of the double indexing of the system in the early 1970s. This double indexing was ended in the 1977 Amendments to the Social Security Act, generating the so called "benefits notch." Because those born in 1916 would attain the early-retirement claiming age of sixty-two in 1978, when the 1977 law went into effect, the 1977 law grandfathered the old benefit rules for all individuals born before January 1, 1917; those born in 1917 to 1921 received benefit reductions that were as much as 20 percent lower than observationally equivalent individuals in the 1916 birth cohort. For those born after 1921, benefits were roughly constant in real terms. In particular, the "notch" birth cohorts (born in 1917 to 1921) received large, unanticipated, and permanent reductions in benefits very late in their working life, to which they had relatively less time to adjust than younger cohorts (Moffitt 1987). This variation was first identified by Alan Krueger and Jörn- Steffen Pischke (1992) as a fruitful means of identifying the behavioral effects of Social Security, in their case in the context of retirement decisions. We follow their methodology to define an instrumental variable for observed Social Security benefits that allows us to trace out the long-run impact of late-career changes in Social Security benefits on subsequent poverty in old age.1 Specifically, we carry out this analysis using data from 1967 through 2000 from the March Current Population Survey to study the elderly who were born in 1885 through 1930. We use these data to form income measures for elderly households and families. Elderly households are all living units in which an elderly person resides; elderly families consist of an elder and his or her spouse. So if an elderly couple co-resides with their children, they are in the same household, but different families. We have several findings of interest. First, while there has been a major decline in absolute poverty among elderly households, that decline has been much smaller for relative poverty, which did not decrease in the 1980s and 1990s. This raises the important question of whether the elderly should or should not share in the increases in the standard of living realized by the non-elderly. Income inequality has also exploded among the elderly in the 1990s. Second, these changes in the income position of low-income elders are fairly similar across age groups, with all age groups following the same basic patterns outlined above. Third, there are important differences in these patterns by marital-status group. In particular, the declines in absolute poverty that we see in the data are much stronger for married than for unmarried elders. Fourth, we document a major causal role of Social Security in driving these time-series patterns. Increases in Social Security generosity over time are strongly negatively associated with changes in poverty. There is, however, a weak association with income inequality, suggesting that Social Security benefits higher-income elders at the same rate as or a higher rate than it benefits low-income elders over this period. Finally, we illustrate the critical role of elderly persons' living arrangements in driving these conclusions. As we document, there were stark changes in the living arrangements of the elderly over the time period we study, with a large shift in living with others to living independently. Our regression results show that the effect of Social Security on poverty is much stronger for families than for households, in particular for widows and widowers and divorcées. This is consistent with the findings of Gary V. Engelhardt, Jonathan Gruber, and Cynthia D. Perry (2005), that higher Social Security benefits cause more independent living among widowed and divorced elders. When those elders move out on their own, they are in the same family, but they become relatively poor households, raising the poverty rate among households. This offsets to some extent the measured poverty reduction among the elderly from higher benefits. After describing the Current Population Survey data, we chart the time-series evolution of elderly income and poverty from 1967 to 2000. Next we outline the principal method used to determine the impact of Social Security in the previous literature and describe the construction of the instrumental variable. We discuss the empirical results in the "Estimation Results" section. There is a brief conclusion.