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Written by: Eugene Steuerle
Source: Author’s estimates based on Congressional Budget Office, The Distribution of Income, 2022.
Government policy for more than 85 years has successfully increased the income and healthcare of elderly Americans, so much so that they are not only less likely to be poor but, by many measures, have reversed roles with the nonelderly population and become the highest-income age group in the U.S. economy. Congressional Budget Office data show that in 1979, 30 percent of people in elderly households were likely to fall into the lowest income quintile (the bottom 20 percent) of the income distribution. That is, they were more likely than average to be lower income. By 2022, that probability had fallen to 11 percent. (See graph above.)
By contrast, nonelderly households with children saw their probability of falling within the bottom 20 percent of households increase from 21 percent to 25 percent. Nonelderly households without children saw an increase from 12 to 18 percent. Keep in mind that when measuring in relative terms, gains in relative status for some must be matched by losses for others. Also, keep in mind that the CBO measure of total income includes health insurance provided by government and employers, which has increasingly become a significant part of each household’s “income.”
Should policy direct these trends to persist?
Unfortunately, for many permanent spending and tax subsidy programs, the U.S. Congress has decided it can never declare success. In this case, it has scheduled the relative status of now-richer older Americans to continue increasing relative to that of now-poorer working-age households, both with and without children. It has scheduled this outcome in various ways, including by requiring benefits for the elderly to increase automatically as wages, life expectancy, and the availability of new, often expensive, health goods and services rise.
But even that’s not the end of the story. Someone has to pay for those gains. In addition to the automatic benefit increases, the decline in birth and immigration rates has dramatically reduced the number of workers whose taxes primarily support each retiree. That alone requires workers to set aside a larger share of their earnings to maintain a given level of benefit transfers to retirees. Congress may delay this effect by borrowing more, but that only adds to costs borne by tomorrow’s workers.
Unlike the graph above, the graph below focuses on the poorest 40 percent of the population and shows the trend from 1979 to 2022. Individuals in elderly-headed households saw their probability of falling into the lower-income groups decline from 55 percent to 30 percent. In contrast, individuals in households with children saw their probability increase from 42 percent to 46 percent, and nonelderly, childless households saw their probability increase from 27 percent to 36 percent.
Source: Author’s estimates based on Congressional Budget Office, The Distribution of Income, 2022.
Comparison to What A Hypothetical Model Would Predict
In two previous notes, here and here, I explained how growth in Social Security and Medicare benefits, along with increased costs to workers from a decline in the worker-to-retiree ratio, can, over time, make the elderly richer than the workers making those transfers. For instance, if the benefits paid to an average retiree are designed to equal 80 percent of the earnings of the average worker, and there are only two worker-taxpayers, then each worker must pay, on average, 40 percent of earnings to cover those costs. Left with only 60 percent of earnings after these payroll taxes, the average retiree ends up richer than the average worker.
Of course, that hypothetical calculation relies on simplified assumptions. It ignores many other factors, such as the structure of the tax system, capital income and taxes, the extent to which some elderly people pay income taxes on their Social Security benefits to support the system, the size of the household, and the extent of deficit financing. Still, it is remarkable that the real-world figures in the graphs presented here on the income of the three major age groups—elderly, households with children, and childless nonelderly households—demonstrate the exact trend the hypothetical model would predict.
Conclusion
Principles of equity and efficiency compel competent government at every period to shift its resources toward society’s greatest needs and opportunities. This requirement for good government holds regardless of whether government itself is large or small. At every margin, its lawmakers ideally would assess what it can do best with each dollar. As it undertakes Social Security and Medicare reform, Congress and agencies, such as the Congressional Budget Office, should formally compare the long-term effects of any proposed reform on the relative status of all age groups.
Otherwise, it is almost impossible to determine efficiently or fairly the appropriate level of transfers for the elderly, paid for largely by nonelderly households, with and without children.
Put another way, neither political party can address the disaffection of the young and working class without asking whether it is time to allocate an increasing share of the government’s growing resources to expand their opportunities and meet their needs.
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