Last week, we discussed the necessity of reforming Social Security. I wished we also talked about the effect of Social Security benefits on reducing elderly poverty, so I looked up few papers on this topic.
In their paper “Social Security: A Program and Policy History”, Patricia Martin and David Weaver gives a brief history of Social Security. Also known as the Old Age, Survivors, Disability Insurance (OASDI), Social Security has its root in the Social Security Act of 1935. The Act provides monthly retirement benefits payable to persons 65 and older who left labor force for retirement. Since its introduction, Social Security has become the primary income source for the elderly. According to Debra Whitman and Patrick Purcell, 58% of income sources aged 65 or older accounted for Social Security in the early 2000s. In their research “Income and Poverty Among Older Americans”, Whitman and Purcell find that the official poverty rate among the elderly has declined sharply as the elderly’s dependency on its benefit increased. For instance, the elderly poverty rate in 1959 was 35%. However, the rate fell to 15% by mid-1970s and stayed at approximately 10% since the mid-1990s. They argue that this notable improvement in the economic wellbeing among the elderly is largely due to the increase in Social Security benefits. Martin and Weaver support this argument with their finding that benefit and coverage increased substantially since the 1950s.
Gary Englehardt and Jonathan Gruber seek to confirm the causal role of the Social Security in reducing poverty. In their working paper “Social Security and the Evolution of Elderly Poverty”, Englehardt and Gruber analyzes the impact of Social Security on the absolute and relative poverty among elderly household and elderly family. Family is a narrower unit in that it only consists of the household heads, his or her spouse, and any children of the head. According to their estimates, each $1000 increase in annual benefit reduces the absolute poverty rates by 2.8 percent point among the elderly households and 5.7 percent point among the elderly families. Englehardt and Gruber also find a similar strong causal role between the $1000 increase in benefit and relative poverty rates. Furthermore, if the Social Security benefits were cut by 10 percent, the absolute poverty rate would increase 7.2 percent among households and 10.5 percent among families (not percent point). The impact of 10% cut is even higher in terms of relative poverty on both households and families. Therefore, Englehardt and Gruber clearly show that the growth in Social Security benefit can explain the decline in elderly poverty since the 1950s.
In “Trends in the Economic Status of the Elderly, 1976-2000”, Thomas Hungerford and his co-authors explain why Social Security has been so effective in reducing the elderly poverty. They argue that although the average receipt of Social Security as income has remained constant, the benefit in real term actually grew over the past 25 years. Hungerford et al gives two explanations for the increase. Firstly, Social Security income keeps up with inflation because it has been indexed for cost-of-living changes since 1972. Secondly, the real wages have been growing since of World War II. Since the initial benefits are calculated based on the lifetime wages, the growth in real wage contributed to enlarging Social Security benefits. Due to these two reasons, Social Security has been successful in reducing elderly poverty compared to other sources of elderly income such as assets, pensions, and public assistance.
So, there is almost a unanimous agreement in academia that Social Security did contribute to reducing the elderly poverty, especially between the late 1900s and early 2000. More reason to reform the current problem of the program?
References
Englehardt, Gary and Jonathan Gruber. “Social Security and the Evolution of Elderly Poverty”. Working Paper 10466, National Bureau Of Economic Research. May 2004.http://www.nber.org/papers/w10466
Hungerford, Thomas, et al. “Trends in the Economic Status of the Elderly, 1976-2000”. Social Security Bulletin. Vol. 64, No. 3. 2001/2002.
Martin, Patricia and David Weaver. “Social Security: A Program and Policy History”. Social Security Bulletin. Vol. 66, No. 1. 2005.
Whitman, Debra and Patrick Purcell. “Income and Poverty Among Older Americans”. Benefits Quarter. Page 48-61. 2006.
3 Comments
Very nice post, social security was indeed hugely important in reducing poverty among older americans. Thanks for providing an overview of the literature!
Query: can we do something similar for children in poverty? or are moral hazard issues different? other reasons grounded in economics to not do so?
In response to Prof. Smitka’s question, I think that there are different issues that must be considered in addressing children in poverty. According to the Center on Budget and Policy Priorities based on data from the U.S. Census Bureau, Social Security lifted approximately 1,021,000 children out of poverty in 2012 (compared to 22,188,000 adults over the age of 65). In total, about 6 million children under the age of 18 (roughly 8 percent of all children in America) received some form of Social Security benefit. The moral hazard issue for children receiving SS is different in that children are not as widely affected by the benefits as the elderly, nor do they have the same voice in the debate on how the future of SS should be handled. There is also growing debate on how long children who receive these benefits should continue to do so, and what their role in the economy will be once they no longer receive these benefits. As HeeJu concluded, this is all the more reason to reform the current program going forward.
A paper called “Why Did Poverty Drop for the Elderly” by Alicia Munnell, April Wu and Joshua Hurwitz also addresses the idea of Social Security and elderly poverty. This paper specifically takes a look at the increase of overall poverty but decrease in elderly poverty in 2009. A main part of this can be attributed to a cost-of-living adjustment and according to the paper the elderly poverty rate is expected in increase when the poverty threshold increases. While cost-of-living changes have been accounted for since 1972 according to the Hungerford paper the change in poverty thresholds must be taken into account and must align with Social Security benefits in order to do the most good.
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