The Rising Burden of Health Spending on Seniors
Thursday, February 01, 2007
by Liqun Liu, Andrew J. Rettenmaier and Zijun Wang
Table of Contents
Income, Wealth and Spending Patterns of the Elderly Population
The incomes and wealth of older Americans are greatly affected by government programs such as Medicare and Social Security. They represent mortality-contingent wealth in the form of transfers from the young. Seniors are also affected by tax and employment policies that influence their decision to work, earn labor earnings and leave bequests. As noted, even though older Americans' medical care is highly subsidized, rising costs will require increasing shares of seniors' budgets. This is particularly true if a cost-sharing shift moves more of the burden onto the elderly population. It is instructive, then, to examine the income and wealth status of older Americans. The conclusion: Income and wealth decline with age, while dependence on Social Security increases.
Income of the Elderly. Figure VI presents per capita income (in 2006 dollars) for households headed by individuals at various ages. Each line traces annual per capita income between 1984 and 2004 for different age groups. According to the figure:
- Real income grew for each age group with the exception of the age-24-and-younger group, which remained relatively constant.
- Those in their peak earning years - ages 45 to 64 - have the highest incomes.
- The per capita income of the aged population - age 65 and older - has been similar over the last two decades to households headed by individuals ages 25 to 44.
Sources of Income Change as Individuals Age. As individuals move through the conventional retirement years, sources of income change dramatically. Among younger seniors - ages 65 to 74 - Social Security and pensions are a major source of income. But in recent years the importance of labor income has grown:
- In 1984, Social Security and pensions accounted for 55.1 percent of income, and labor earnings constituted 31.3 percent. [See Figure VII.]
- By 2004, Social Security and pensions were only 47.7 percent of income, and labor market earnings rose to 45.7 percent.
“People ages 45 to 64 have the highest average income.”
The rise in labor income is a result of increased labor market participation among these workers, which can be attributed in large part to the elimination of the Social Security earnings test for those who reach the normal retirement age. 18 In fact, in 2005, 28.3 percent of individuals ages 65 to 69 were in the labor force, compared to 16.3 percent of those ages 70 to 74, and only 6.4 percent of individuals age 75 and older.
In contrast to the younger retirees, the importance of each income source has been relatively constant for individuals age 75 and older. The figure shows that, compared to the younger seniors, the importance of Social Security and pensions are higher and labor income much lower. Over time, for the older seniors, Social Security and pensions averaged 70.8 percent of income; labor earnings averaged 12.6 percent; interest, dividends and rents averaged 14.2 percent; and all other sources averaged 2.4 percent.
As Incomes Fall, Dependence on Social Security Rises. The information above from the Consumer Expenditure Survey is corroborated by the 2004 Survey of Consumer Finances. 19 The major income and wealth statistics are presented by age group in Table III. As expected, income and net worth falls with age while dependence on Social Security rises.
“Almost half the income of younger seniors in 2004 was from work, on the average.”
- Average household income falls from $55,800 for seniors ages 65 to 74, to $41,400 for seniors ages 75 to 84, and to $26,000 for seniors age 85 and older.
- Some of the decline results from the lower number of people per household in the older age categories; even so, the distribution of per capita income declines with age, too.
- The respective per capita annual incomes from youngest to oldest age groups are $31,700, $26,700 and $19,900.
“Seniors' per capita income falls with age.”
As seniors age, household incomes fall. Across all age groups, most households (56.8 percent) had incomes of $30,000 or less. By contrast, for households headed by a 65- to 74-year-old, 48.5 percent had incomes of $30,000 or less, while the proportion rose to 62.6 percent for households headed by individuals ages 75 to 84, and to 72.0 percent for those age 85 and older.
The survey data also show that as seniors age, Social Security benefits account for a greater portion of income:
- Social Security accounts for 80 percent or more of income in 19.5 percent of the households headed by 65- to 74-year-olds, 29.1 percent of the households headed by 75- to 84-year-olds, and more than a third of the oldest age group.
- Similarly, Social Security represents half or more of income in 41.7 percent of the households headed by people 65 to 74 years of age, 51.9 percent of the households headed by people 75 to 84 years of age, and 73.9 percent of the oldest age group.
Wealth of the Elderly. The "net worth" of the elderly population falls with age. A family's net worth is the combination of financial assets (stocks, bonds, mutual funds, retirement accounts, and savings and checking accounts) and nonfinancial assets (real estate, vehicles and so forth), less any debts.
“Seniors' household wealth falls with age.”
As noted, the primary sources of income for older Americans are pensions and Social Security. They provide flows of income to retirees, but are seldom measured as wealth. That is, the mortality-weighted expected present values of such flows are not typically counted as assets by individuals or families. In contrast, the accumulated value of mutual or money-market funds in a defined contribution plan is counted as an asset and included in wealth. Such funds differ from pensions and Social Security in that they are not contingent on mortality. Further, primary residences and vehicles are not reported as income, but are included in measures of wealth.
“Older seniors spend more on health care.”
As Table III shows, the median and average net worth for households headed by individuals ages 65 to 74 was $190,000 and $692,000, respectively; the few seniors with very high net worth skew the average, so it is much higher than the median net worth. In general, the values decline with age; interestingly, the oldest age group has the highest median net worth.
Spending Patterns of the Elderly. In 2004, 30.5 percent of the total spending of seniors ages 65 to 74 was on housing, 13.3 percent on food and 45 percent on other goods; meanwhile, health care spending averaged only 10.4 percent. 20 Health spending is somewhat higher for seniors age 75 and older, averaging about 15.5 percent of their total spending. [See Figure VIII.]
The spending patterns of the elderly population as noted for 2004 are indicative of the patterns that have existed over the past 20 years. This is true even in the case of out-of-pocket health care spending, since rising health costs have been borne largely by public and private third-party payers. Given the growth in Medicare premiums - and the likelihood of increasing pressure to shift a greater portion of the cost onto seniors - the elderly will see an increasing portion of their household budget consumed by health care costs.