In this Q&A, Senior Fellow John F. Cogan and Policy Fellow Daniel Heil discuss their new research that uncovers the substantial income growth of senior citizens in the United States over the last four decades.

Cogan and Heil document a large growth in incomes of households headed by senior citizens from 1982 to 2018. During this period, the median income of households headed by persons age 65 and older rose 85 percent, after adjusting for inflation. This growth was four times faster than the corresponding increase among households headed by younger persons. They find that the biggest drivers of senior income growth were private retirement savings and changes in work patterns. There has been a remarkable rise in employment among both senior men and women, as well as in participation in defined contribution plans, such as Individual Retirement Accounts (IRAs) and 401(k)s. For most seniors, Social Security played a surprisingly small role. The data reveal that the median senior household income, adjusted for household size and taxes, is now about the same as the median household income among younger generations, a drastic difference from forty years ago.

Their findings have important policy implications for addressing the rising costs of Social Security and Medicare. The scholars argue that increased income among seniors from private sources presents an opportunity to reduce the growing fiscal burden. To this end, they argue that the US government should consider reforming Social Security and Medicare to make them more progressive to the benefit of lower-income seniors. Meanwhile, elected officials should continue to improve on policies that encourage the accumulation of private savings and less reliance on government during old age.

Can you describe what prompted you both to conduct this research?

John Cogan: Two challenges that concern us most are, first, the cost of senior citizen federal entitlement programs. The other is that both Medicare and Social Security, the two main programs for senior citizens, will become insolvent within the next decade. Let me talk about the budget problem first, and then Danny will talk about the crises that Social Security and Medicare face.

Reining in the growth of the national debt is the central fiscal challenge facing the country. It can’t be done without slowing the growth in expenditures on programs for the elderly or imposing a very large tax increase on the middle class. Social Security, Medicare, and other programs for senior citizens now account for 40 percent of all non-interest federal spending. In the next ten years, if these programs aren’t reformed, they will account for almost 80 percent of the growth in federal spending. Stopping the growth in the national debt without altering these programs will require an across-the-board tax increase of around 70 percent.

Daniel Heil: The Social Security Trustees just released new numbers last week. The Trustees’ Report showed that the Trust Fund is due to be insolvent by 2034. Medicare's Hospital Insurance (HI) Trust Fund is going to be insolvent by about 2028. When those days arrive, Congress better have a plan in place to reform those programs. And it's important that our policy makers enact reforms soon, because if they wait until 2028 or 2034, then the only options are higher taxes or draconian spending cuts. In our research, we highlight who is currently being helped by these programs and who still needs help, and we provide policy makers a close look at recipients’ incomes—information policy makers need when they consider how they should reform these two programs.

John Cogan: The issues surrounding Social Security and Medicare, which account for the lion's share of federal spending on the elderly, are politically explosive. A few months ago, President Biden in his State of the Union said that the Republicans were going to cut these programs. Immediately, the Republicans shouted out, "No, no!" What Danny and I hope to accomplish with the publication of this paper is to inform the debate with facts to allow for a dispassionate analysis of the options for making Social Security and Medicare solvent.

What are the biggest drivers of the senior income growth?

John Cogan: There have been two main drivers behind the growth in the median income of senior households: (1) income from private retirement plans, and (2) income from employment.

Income from retirement plans over the last forty years has increased by about 300 percent; that’s a fourfold increase. Labor earnings have nearly tripled. There is a policy reason for both dramatic increases. In the early 1980s, the two main types of defined contribution plans were just coming of age: Individual Retirement Accounts (IRAs) and 401(k) plans, which had been enacted in 1974 and 1978 respectively. The growth of participation in those defined contribution plans has boosted private retirement income for seniors.

For employment, the situation is a little bit different. Since the mid-1990s, there has been a historic change in the employment patterns of seniors. Employment among both senior men and women has been steadily rising. This is a reversal of a trend since at least the end of World War II for men and at least since the beginning of the 1960s for women.

Daniel Heil: For low-income seniors, we see the growth in both employment earnings and in retirement income, but still about half of the growth is from increases in Social Security benefits. Among the upper half of the income distribution, we find higher growth in Social Security income than in the bottom half, but Social Security is much more important to low-income seniors, as you would expect.

What is the factor driving that income growth among older seniors?

John Cogan: Their Social Security income growth wasn’t a significant factor. In fact, the factors were increased employment among this group, private savings plans, and overall asset accumulation over their lifetimes.

When adjusted for household size, how do seniors' earnings compare to non-seniors'?

John Cogan: One of the more remarkable findings of our work is that the median senior household income is now about the same as the median household income among younger households, after adjusting for household size and taxes. This is a drastic difference from forty years ago.

This convergence of senior and non-senior adjusted income occurs across the income distribution. An especially important finding is that incomes among low-income seniors have risen much faster than the incomes among low-income younger populations.

Daniel Heil: There are also other costs that we haven't included, such as health care. But generally, the point stands that once you control for taxes and household size, you really don't see a difference in median incomes between seniors and non-seniors. This trend started in the late 1990s, and the adjusted incomes converged by 2012. In the last ten years, there has not been a whole lot of difference between seniors and non-seniors, at least around middle-income levels.

John F. Cogan: One additional point: the growth in senior incomes has been broad-based. The purchasing power of income among seniors at the 25th and 75th percentile of the senior household income distribution nearly doubled, after adjusting for inflation. Seniors today who are at the 25th percentile of the income distribution have as much purchasing power as a median-income senior household in 1982. So low-income seniors today are living just as well as the typical senior forty years ago.

There is a particular concern in policy circles about income levels of very old seniors. However, we found that over the past forty years, incomes of seniors in households headed by persons 75 years or older grew faster than those in the households headed by persons 65 to 70 and 70 to 74.

Daniel Heil: This isn’t just in percentage terms, but in the absolute dollar value. So, it wasn't that they were just starting at a lower base.

John Cogan: Right. This comes back full circle to our original point, just how broad-based the income growth was among seniors.

Can we expect, though, when these non-seniors reach retirement age, that their earnings will grow at the same rate that seniors are experiencing today?

John Cogan: Tough to say. One of the big disruptions in recent years, of course, was the COVID-19 pandemic. Now certainly if Danny and I were answering your question in 2019 or early 2020, we would have said that there is absolutely no reason why the trends that we have observed in the data, both for retirement income and for work patterns among seniors, wouldn't continue in the future. The pandemic, however, was a big disruption to work patterns, not just among seniors, of course, but among the entire population.

What we have seen so far is that there has been a very strong rebound in employment among seniors since the falloff in 2020 that was a consequence of the pandemic and the lockdowns. Employment hasn't recovered all the way back to its pre-pandemic levels, but I think it's about three-fourths of that level. Danny, is that right?

Daniel Heil: That's about right. We certainly see the recovery among younger people; they are back to their pre-COVID levels. But among seniors, particularly around the age of 65 or so, you do see a drop-off. But the important thing to remember is that is from a very high base. If you trace employment rates back a decade, the 2023 level is higher than it was in 2016 or 2017. What we are observing today is that employment trends are remarkably strong relative to recent history.

Prior to reaching retirement age, did today’s seniors have similar income levels as their non-senior counterparts?

Daniel Heil: Generally, that is true. Incomes are rising over time for those close to retirement. The same can be said for assets. We are planning to write a longer paper that will delve into asset trends over time.

There is certainly some cyclicality in income and asset trends depending on economic conditions, but overall, you are seeing the growth continue in a way that suggests today's seniors are doing well and that there is no reason to believe that tomorrow's seniors are going to be worse off.

The next edition of the Survey of Consumer Finances (which we use for most of our analyses) will be released in the next few months. This data will include the impact of COVID-19 on incomes and assets. It probably won’t cover the recent stock market downturns, but it's going to give us more information on whether there will continue to be effects from the pandemic and whether the long-term trends we’ve identified are continuing for those reaching retirement age.

John Cogan: We don't directly address how much of a person's pre-retirement income is replaced by Social Security and other forms of retirement income. That is a subject of a separate analysis that we will be doing in the next couple of months. But essentially what Danny said is absolutely right. What we're seeing is a substantial amount of income being replaced in retirement years.

What types of policy reforms do you think can be implemented to address US budget constraints caused by the expense of programs for the elderly in the next decade?

John Cogan: On Social Security, there are two important implications of our work. One is that the extraordinary growth in income sources other than Social Security suggests to us that Social Security benefits do not need to continue increasing annually in real terms in the future. Most people don't know this, but the benefits that are promised to future retirees are generally higher, after adjusting for inflation, than those that are received by today's retirees. Those increases have been automatically taking place since the mid-1970s. Slowing that growth to the rate of inflation is appropriate.

The other implication relates to the distribution of Social Security benefits. Social Security now accounts for only about 18 percent of the $157,000 mean income among senior households in the upper half of the senior income distribution. So, for them Social Security has become relatively unimportant. Therefore, some lessening of Social Security benefits and more reliance on other forms of income is appropriate for them.

On the other hand, Social Security still accounts for about 80 percent of benefits received by households in the lower half of the income distribution. So, Social Security remains important for this group. Making Social Security more progressive would be an appropriate policy direction for the program to take.

Daniel Heil: There is certainly room for reform. Now politically, whether that's popular or not, that's another issue.

I think we should be thinking about policy reforms that boost private savings and labor earnings, which, as we mentioned above, have been the two biggest drivers of growth among median income seniors. Policy makers should be looking to strengthen those trends.

On the labor side, certainly tax policy reforms and deregulation are good places to start.

On the retirement side, there are policies that can be achieved on a bipartisan basis. Recently, Congress has passed two different acts that have tried to strengthen some of the defined contribution retirement programs, the SECURE Act and then the SECURE Act 2.0. Historically, there have been cumbersome regulations that have prevented smaller businesses from offering defined contribution plans. These laws were intended to liberalize some of the rules, to allow small businesses, in particular, to provide these plans to their employees.

Participation rates, among people who are not quite seniors yet, in defined contribution plans are plateauing. This reality suggests that we can do more to encourage people to save. We will see within the next few years whether the SECURE Act and SECURE Act 2.0 will make a substantial difference.

John Cogan: Over the last forty years good public policies have created and expanded private retirement savings vehicles. They’ve also improved work incentives to allow workers to prepare better for their retirement years and to be less reliant on government programs. Recognizing this, the implication of our work is that government would be wise to continue to create incentives to encourage individuals to rely less on the public sector during their retirement years. If we don't continue to allow private savings and employment to grow, we are going to end up imposing a very large tax on younger households.

Daniel Heil: The fact that private savings and labor participation rates have grown among seniors over the past forty years is a remarkable success. Meanwhile, the indexing of Social Security in the 1970s to keep up with inflation was more than enough to ensure seniors maintain a standard of living to which they were accustomed in their pre-retirement years. Our data show these two points. This gives policy makers an opportunity to rethink the way the federal budget looks while ensuring seniors continue to experience impressive income gains.

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