Income Growth and Future Poverty Rates of the Aged

Summary

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This article estimates effects of future growth in income on the poverty rates of the elderly. If real earnings and other income were to increase steadily at 1 percent per year, poverty among the elderly, 10.5 percent in 1997, would decrease to about 7.2 percent in 2020 and to 4.1 percent in 2047, assuming no Social Security benefit reductions to maintain solvency. The article discusses several other aspects that might affect future poverty rates, including changes in other income components like Supplemental Security Income, earnings, and pensions; changes in longevity and marital patterns; and changes in the distribution of earnings.

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Income Growth and Future Poverty Rates of the Aged

Acknowledgments: The authors wish to acknowledge comments received from Barbara Butrica, Susan Grad, Thomas Hungerford, Howard Iams, Michael Leonesio, Joyce Manchester, and Hilary Waldron.

* The authors are with the Division of Economic Research, Office of Research, Evaluation, and Statistics, Office of Policy, Social Security Administration.

Summary

This article estimates the effects of 50 years of steady growth in incomes on poverty rates among the elderly. It assumes that the poverty threshold continues to be adjusted for inflation but not for increases in real incomes. Simulations with the March 1998 Current Population Survey indicate that if the benefit rules for Social Security and Supplemental Security Income (SSI) are not changed and if earnings and other sources of income in an otherwise unchanging population grow by 1 percent per year (the intermediate assumption about earnings growth used in the Social Security Trustees' Report), poverty among the elderly will decrease from 10.5 percent in 1997 to about 7.2 percent in 2020 and to 4.1 percent in 2047.

These projected poverty rates are quite sensitive to both the assumption about earnings growth and the assumption that benefits are not further reduced to maintain solvency. This article quantifies the sensitivity of the results to these assumptions and discusses several other aspects that might affect future poverty rates--changes in other income components like SSI, earnings, and pensions; changes in longevity and marital patterns; and changes in the distribution of earnings.

Introduction

A sustained growth in earnings should eventually lead to lower poverty rates among the elderly. This article attempts to roughly quantify the reduction in poverty that can be expected from several decades of growth in wages and to identify the important factors that might forestall this reduction.

The relationship between rising earnings and falling poverty rates among the elderly is fairly straightforward, although the exact size is difficult to project accurately. The most important components of retirement income--including Social Security benefits, pension income, and even much of the income from individual savings--are derived from labor earnings earlier in life. An increase in earnings should therefore lead eventually to an increase in the retirement incomes derived from those earnings. An increase in retirement incomes should reduce poverty among the elderly. Because the U.S. poverty line is indexed to prices rather than to real income growth, a prolonged period of income growth--by raising earnings and eventually retirement incomes relative to the poverty line--should reduce poverty among the elderly to low levels. The faster the growth in real incomes, the faster the fall in poverty rates.

Real earnings have not grown at a constant rate historically, and future long-term growth rates are quite uncertain. To indicate the range of uncertainty, the annual Trustees' Reports for the Social Security trust funds have tradition...

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