Order Code RL32697 Income and Poverty Among Older Americans in 2006 Updated September 24, 2007 Patrick Purcell Specialist in Income Security Domestic Social Policy Division Income and Poverty Among Older Americans in 2006 Summary Older Americans are an economically diverse group. In 2006, the median income of individuals aged 65 and older was $16,890, but incomes varied widely around this average. Twenty-three percent of Americans 65 or older had incomes of less than $10,000 in 2006, while 12% had incomes of $50,000 or more. As Congress considers reforms to Social Security and the laws governing pensions and retirement savings plans, it may be helpful to examine how changes to one income source would affect each of the others, and thus the total income of older Americans Older persons receive income from a variety of sources, including earnings, pensions, personal savings, and public programs such as Social Security and Supplemental Security Income. Using data from the March 2007 Current Population Survey, this report describes the number of elderly receiving income from each of these sources and the extent to which income from each source is either concentrated at the high end or low end of the income distribution or is evenly distributed. Retirement benefits from Social Security and pensions are the most common sources of income among the aged. In 2006, Social Security paid benefits to 86% of Americans aged 65 and older. Social Security is also the largest single source of income among the aged. Sixty-eight percent of Social Security beneficiaries aged 65 or older receive more than half of their income from Social Security. For 39% of elderly recipients, Social Security contributes more than 90% of their income, and for one-quarter of recipients, it is their only source of income. In 2006, 35% of people aged 65 and older received income from a private or public pension. Among people aged 65 and older who reported income from a government pension, the median annual amount was $14,400. Among recipients of private pensions, the median amount received in 2006 was just $7,200. Many Americans prepare for retirement by saving and investing some of their income while they are working. Of the 36.0 million Americans aged 65 or older who were living in households in 2006, 19.4 million (54%) received income from assets, such as interest, dividends, rent, and royalties. Most received small amounts of income from the assets they owned. Of all individuals aged 65 or older who received income from assets in 2006, half received less than $1,685. Earnings from work continue to be an important source of income for older Americans, especially those under age 70. Although there was a trend toward earlier retirement from about 1960 to 1985, over the past 20 years more Americans have continued to work at older ages. In 2006, median earnings of individuals aged 55-61 who worked were $37,000, while the median earnings of workers aged 62-64 were $30,000. Among workers 65 and older, median earnings were $19,000. Poverty among those aged 65 and older has fallen from one in three older persons in 1960 to less than one in ten today. Although the overall rate of poverty is relatively low, it remains high for women, minorities, the less-educated, and people over age 80. This report will be updated annually. Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 The Near-Poor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Income from Retirement Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Social Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Income from Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Work-Related Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Unemployment Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Workers’ Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Income from Veterans’ Compensation and Veterans’ Pensions . . . . . . . . . 19 Income from Public Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 List of Figures Figure 1. Sources of Income, Top Quartile, Aged 65+ . . . . . . . . . . . . . . . . . . . . . 5 Figure 2. Sources of Income, Second Quartile, Aged 65+ . . . . . . . . . . . . . . . . . . 5 Figure 3. Sources of Income, Third Quartile, Aged 65+ . . . . . . . . . . . . . . . . . . . . 6 Figure 4. Sources of Income, Bottom Quartile, Aged 65+ . . . . . . . . . . . . . . . . . . 6 Figure 5. Mean Income by Source and Income Quartile, 2006 . . . . . . . . . . . . . . . 7 Figure 6. Median Income in 2006 by Demographic Group . . . . . . . . . . . . . . . . . 7 Figure 7. Percentage of People Aged 65 and Older in Poverty, 2006 . . . . . . . . . . 8 Figure 8. Amount of Social Security Income in 2006 . . . . . . . . . . . . . . . . . . . . . 11 Figure 9. Income from Public and Private Pensions in 2006 . . . . . . . . . . . . . . . 13 Figure 10. Percentage of People Aged 65 and Older with Income from Assets, by Total Income in 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Figure 11. Employment Rates by Age and Sex, March 2007 . . . . . . . . . . . . . . . 17 Figure 12. Earned Income by Age, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 List of Tables Table 1. Percentage of Older Americans with Income in 2006, Mean and Median Amounts, by Source . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Table 2. Social Security as a Percentage of Income among Recipients Aged 65 and Older in 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Table 3. Income from Assets Among People 65 and Older, 2006 . . . . . . . . . . . 16 Income and Poverty Among Older Americans in 2006 Introduction This report describes the income and poverty status of the 36 million Americans aged 65 and older living in the community in 2006.1 Older persons receive income from a variety of sources, including earnings, pensions, personal savings, and public programs such as Social Security and Supplemental Security Income. The substantial variation in the number of people receiving income from each source and the amounts they receive from each source are the main topics of this report. Using data from the March 2007 Current Population Survey, this report describes both the number of elderly receiving income from each of 10 major sources and the extent to which income from each source is either concentrated at the high end or low end of the income distribution or is more evenly distributed among the elderly population. In addition to looking at sources and amounts of income, the report examines the income of the elderly relative to the federal poverty thresholds. In 2006, 9.4% of Americans 65 and older had family incomes below the federal poverty thresholds of $9,669 for a single person and $12,186 for a couple. The 2006 poverty rate for Americans 65 and older was lower than both the poverty rate for the population 18 to 64 years old (10.8%) and the poverty rate among children under age 18 (17.4%).2 Although income is an important measure of a person’s economic well-being, it is not the only such measure, nor is it always the best one. Individuals with the same cash income may have significantly different levels of financial assets or other forms of wealth. Some own their own homes while others rent. Some receive noncash benefits from their former employers, such as fully or partially paid health insurance, while others have to pay for health services or insurance out-of-pocket. The federal and state governments also provide many non-cash benefits and services such as Medicaid, Food Stamps, and the Low-Income Home Energy Assistance Program that improve the financial circumstances of lower-income families, but which do not show up in measures of cash income. Finally, some older Americans live with family members or receive considerable non-financial assistance from their families, while others live alone and pay someone to perform household chores or to provide personal care services. Even with these limitations, however, the amount of income that older Americans receive is an important measure of their ability to purchase the goods and services that contribute to their economic well-being. 1 2 This number does not include approximately 1.6 million elderly who live in nursing homes. U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States, 2006; P60-233, Table 3, p. 12, [http://www.census.gov/prod/2007pubs/p60-233.pdf]. CRS-2 The Data The findings in this report are based on data collected in the March 2007 Current Population Survey (CPS), conducted by the Bureau of the Census. The March 2007 CPS consisted of interviews with approximately 75,500 households, comprising a representative sample of the civilian, non-institutionalized population of the United States. Each March, the survey includes detailed questions on sources and amounts of income received during the previous calendar year. The CPS is widely used by researchers in government, academia, and the private sector, and it is the source of the official statistics published annually by the Census Bureau on median family income, the number of Americans living in poverty, and the number of people without health insurance. Like any survey, the CPS is subject to error. Sampling error occurs if the households selected to participate in the survey are not representative of the population. Non-sampling error occurs if survey participants provide inaccurate information or if their responses are incorrectly recorded. How Income Was Counted All income figures in this report are for individual elderly persons. Focusing on the income of individuals rather than families or households may overstate the resources available to some elderly and underestimate the resources available to others within the same family. For example, an elderly couple may receive a pension from a husband’s former employer. The pension income would only be attributed to the husband and not his wife even though she may share in the benefits of that income. Although the income figures may not reflect the total income available within a family, the advantage of this methodology is that it provides an accurate count of the number of older Americans who receive income from specific sources such as pensions or public assistance. To calculate poverty rates, however, the income of all family members was combined before comparing it to the official federal poverty thresholds.3 Total Income Both the sources of income and the amounts received from each source differ among elderly persons of different ages. For example, individuals 80 and older are more likely to receive income from pensions and Social Security and are less likely to have earned income than the elderly who are between the ages of 65 and 69. (See Table 1) Comparing those 80 and older to those aged 65 to 69, the older group received, on average, $7,000 less in earnings, $5,200 less in public pensions, and $4,188 less in private pensions. The older group received $336 more in Social Security than their younger counterparts and $215 more in asset income. Total income also declined with age. Median total income in 2006 was $20,518 for 3 For information on long-term trends in the income of older Americans that were calculated for both individuals and households, see CRS Report RL33387, Income of Americans Age 65 and Older, 1969 to 2004, by Patrick Purcell and Debra Whitman. CRS-3 persons 65 to 69 years old, $16,447 for those aged 70 to 79, and $15,462 for individuals age 80 or older. Personal savings, Social Security, and employer-sponsored pensions are sometimes referred to as the “three-legged stool” of retirement income. Although this term may be useful as a metaphor, for many older Americans, at least one of the legs of the stool is missing. Figure 1 and Figure 4 illustrate this point for individuals in the highest and lowest quartiles of the income distribution. In 2006, 83% of the income received by elderly individuals in the lowest income quartile (those with less than $10,530 in total income) came from Social Security. For this group, just 5% of their income came from savings and only 3% was received from pensions. Older Americans with higher incomes had more diversified sources of income. In 2006, 20% of income received by individuals in the highest quartile of the income distribution (those with $30,100 or more in income) came from Social Security. These individuals also were more likely to have wage income and to receive income from pensions and assets. They received, in the aggregate, more than three-fourths of their income from these three sources. Figure 2 and Figure 3 show that Social Security comprised 56% and 81%, respectively, of income received by older Americans in the second and third income quartiles in 2006. The average amount received in 2006 from each income source by people in the lowest and highest income quartiles is shown in Figure 5. Those in the poorest quarter of the elderly population received an average of $5,834 from Social Security, $130 from earnings, $185 from pensions, and $342 from assets. Older Americans in the highest income quartile received on average $12,797 from Social Security, $22,868 from earnings, $14,486 from pensions, and $12,617 from assets. There are significant financial advantages from continuing to work past age 65. On average, members of the highest income quartile received more than one-third of their income from working. Income received by the elderly varies significantly by age, sex, race, education and marital status. Figure 6 shows that in 2006, individuals between the ages of 65 and 69 had a median income of $20,518 while those who were 80 or older had a median income of $15,462. Men 65 and older had a median income of $23,419, while women 65 and older had a median income of $13,440. The median income of older African Americans, $12,862, was 71% of the median income of older white Americans — $18,150. The median income of older Americans increases substantially with their educational level. Those without high-school diplomas had a median income of $12,062 in 2005 while college graduates had a median income of $32,000. The median income of married individuals aged 65 and older — $17,809 — was $1,507 higher than single individuals aged 65 and older. CRS-4 Table 1. Percentage of Older Americans with Income in 2006, Mean and Median Amounts, by Source Total number of people (000s) Percentage with no income Earnings Percentage with earnings Mean Median Social Security Percentage with Social Security Mean Median Public pensions Percentage with public pensions Mean Median Private pensions or annuities Percentage with private pensions Mean Median Income from assets Percentage with income from assets Mean Median Veterans’ benefits Percentage with veterans’ benefits Mean Median Public assistancea Percentage with public assistance Mean Median Other incomeb Percentage with other income Mean Median Total Income Percentage with any income Mean Median Total, 55+ 68,226 5.0 Age 55 to 64 Total, 65+ 65 to 69 32,191 36,036 10,629 6.9 3.4 3.7 70 to 79 15,936 3.3 80+ 9,471 3.2 41.7 $45,231 $32,000 67.4 $48,867 $35,000 18.7 $33,545 $19,000 33.6 $37,727 $23,000 17.1 $27,719 $14,400 4.8 $35,597 $16,000 53.7 $11,615 $11,394 17.2 $11,008 $10,308 86.4 $11,722 $11,670 79.6 $11,872 $11,526 88.5 $11,632 $11,562 90.4 $11,723 $11,862 9.1 $21,677 $17,041 6.6 $24,890 $21,000 11.4 $20,017 $14,400 10.6 $23,312 $19,200 11.4 $19,020 $14,400 12.3 $18,370 $14,000 16.6 $12,658 $8,350 8.9 $17,078 $12,000 23.5 $11,166 $7,200 19.9 $13,552 $9,600 24.9 $11,144 $7,320 25.3 $9,097 $5,412 54.1 $6,881 $1,243 54.6 $6,400 $902 53.7 $7,317 $1,685 54.7 $7,403 $1,585 54.0 $7,143 $1,623 52.4 $7,520 $1,800 2.5 $12,060 $9,348 2.2 $13,389 $10,812 2.7 $11,079 $7,630 1.6 $11,492 $8,400 2.6 $12,357 $9,600 4.1 $9,526 $6,300 3.2 $5,883 $6,000 3.4 $6,883 $7,200 3.0 $4,861 $4,368 2.9 $5,252 $5,484 2.9 $4,684 $4,080 3.0 $4,723 $4,200 4.0 $9,141 $4,760 5.4 $8,894 $4,800 2.7 $9,592 $4,250 3.2 $9,555 $4,420 2.5 $10,268 $4,830 2.4 $8,483 $3,600 95.0 $35,542 $21,982 93.1 $45,631 $32,000 96.6 $26,854 $16,890 96.3 $33,218 $20,518 96.7 $25,368 $16,447 96.8 $22,252 $15,462 Source: The Congressional Research Service (CRS) analysis of the March 2007 Current Population Survey. a. Includes mainly Supplemental Security Income, Temporary Assistance for Needy Families, and state general assistance. b. Includes unemployment compensation, workers’ compensation, and income from unidentified sources. CRS-5 Figure 1. Sources of Income, Top Quartile, Aged 65+ 2006 Income of more than $30,100 Public Assistance 0% Other Income 2% Social Security 20% Asset Income 20% Pensions 23% Earnings 35% Figure 2. Sources of Income, Second Quartile, Aged 65+ 2006 Income of $16,890 to $30,100 Public Assistance Asset Income 0% 11% Other Income 2% Pensions 20% Social Security 56% Earnings 11% Source: Both figures from CRS analysis of the March 2007 Current Population Survey. CRS-6 Figure 3. Sources of Income, Third Quartile, Aged 65+ 2006 Income of $10,530 to $16,890 Public Assistance 1% Asset Income 6% Pensions 8% Other Income 1% Earnings 3% Social Security 81% Figure 4. Sources of Income, Bottom Quartile, Aged 65+ 2006 Income of less than $10,530 Asset Income Public Assistance 6% 5% Other Income 1% Pensions 3% Earnings 2% Social Security 83% Source: Both figures from CRS analysis of the March 2007 Current Population Survey. CRS-7 Figure 5. Mean Income by Source and Income Quartile, 2006 $25,000 $22,868 Mean Annual Amount $20,000 $14,486 $15,000 $12,797 $12,617 $10,000 $5,834 $5,000 $1,539 $130 $404 $342 $185 $23 $61 $0 Social Security Earnings Pensions Asset Income Public Assistance Other Income Source of Income Lowest Quartile Highest Quartile Marital Status Figure 6. Median Income in 2006 by Demographic Group $16,302 Not Married $17,809 Married $32,000 Education College Graduate $19,300 Some College $16,302 High School Grad $12,062 Less than 12 years $10,862 Race Hispanic $12,862 Black $18,150 Sex White $13,440 Women $23,419 Men $15,462 Age 80+ $16,447 70-79 $20,518 All age 65 + 65-69 $16,890 All $- $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 Source: Both figures from CRS analysis of the March 2007 Current Population Survey. CRS-8 Poverty Poverty among the elderly has decreased dramatically over the past five decades. In 1959, the poverty rate among Americans aged 65 and older was 35%. Largely due to increases in Social Security benefits, the elderly poverty rate fell dramatically between the mid-1960s and mid-1970s, declining to about 15% by 1975. The percentage of older Americans in poverty has stayed steady at roughly 10% since the mid-1990s. Although a smaller percentage of the elderly are in poverty than are people under 65, in 2006, 3.4 million Americans aged 65 and older had family incomes below the federal poverty threshold.4 Marital Status Figure 7. Percentage of People Aged 65 and Older in Poverty, 2006 16% Not Married 4% Married 5% Education College Graduate 7% Some College 8% High School Grad 18% Less than 12 years 19% Race Hispanic 22% Black 7% Sex White 12% Women 7% Men 11% Age 80 and up 70 to 79 9% 8% All Age 65+ 65 to 69 9% All 0% 5% 10% 15% 20% 25% Source: CRS analysis of the March 2007 Current Population Survey. 4 This section combines the total income of each family member and compares it to the official poverty threshold based on the size of the family. The official poverty threshold in 2006 for a single person aged 65 or older was $9,669. The poverty threshold for a couple in which at least one member was 65 or older was $12,186. See Poverty Thresholds 2006, available at [http://census.gov/hhes/www/poverty/threshld/thresh06.html]. Note that there are two slightly different official government versions of the level of income at which one is considered poor. The first — and the one used in this analysis — is the poverty threshold which the Census Bureau uses to count the number of poor in the United States. The second measure, the poverty guideline, is used by the Department of Health and Human Services to set eligibility criteria for a number of federal programs. CRS-9 While the poverty rate for all persons aged 65 and older was 9.4% in 2006, the poverty rates among women, minorities, single individuals, those with low education, and the oldest old were higher. (See Figure 7.) Twelve percent of women aged 65 and older were in poverty in 2006 compared with only 7% of men. Because women live longer, the number of poor older women in 2006 (2.4 million) was more than twice the number of poor older men (1.0 million). Poverty rates were especially high among minorities. In 2006, nearly one-quarter of elderly African-Americans and one-fifth of elderly Hispanics were in poverty. About 80% of all older Americans identify themselves as white. Thus, while only 7% of older white Americans were poor, poor whites comprised 60% of all poor elderly in 2006. Older individuals with low education also had high poverty rates. Eighteen percent of those without a high school education had family incomes below the poverty line in 2006 compared with only 5% of those with a college degree. There is a significant difference in the poverty rates of married persons and single elderly individuals. Married couples, who often have more than one source of income, had a poverty rate of only 4% in 2006. In contrast, 16% of unmarried individuals aged 65 and older had incomes less than the official poverty threshold in 2006. The oldest Americans had the highest poverty rates. Eleven percent of individuals age 80 and older were poor in 2006 compared with 8% of individuals between the ages of 65 and 69. In addition, 30% of all Americans age 80 and older had family incomes of less than 150% of the poverty threshold in 2006. (Not shown in Figure 7.) The Near-Poor Many older Americans have family incomes that put them just above the official poverty threshold. In 2006, while just 9.4% of people aged 65 and older had incomes below the poverty thresholds of $9,669 for an individual and $12,186 for a couple, 22% of older Americans had family incomes below 150% of the thresholds ($14,504 for an individual and $18,279 for a couple). Thirty-six percent of people 65 and older had incomes less than twice the poverty thresholds ($19,338 for an individual and $24,372 for a couple). Income from Retirement Benefits Social Security5 Retirement benefits from Social Security are the most common source of income among the aged. Social Security is a social insurance program designed to protect workers, their dependent children, and surviving spouses in the event that a worker dies, becomes disabled, or reaches retirement age. In 2006, Social Security paid benefits to 86% of Americans aged 65 and older living in households. Social Security is the largest single source of income among the aged. Sixty-eight percent of Social Security beneficiaries aged 65 or older receive more than half of their income from Social Security. For 39% of elderly recipients, Social Security 5 For a complete description of the Social Security program, see the House Committee on Ways and Means, committee print, WMCP: 108-6, 2004, 2004 Green Book, Chapter 1, at [http://waysandmeans.house.gov/media/pdf/greenbook2003/Section1.pdf]. CRS-10 contributed more than 90% of their income in 2006, and for one-fourth of all aged recipients, it was their only source of income. (See Table 2) While Social Security is an important source of income for a majority of the elderly, the benefit amounts paid by Social Security are relatively small compared with many recipients’ preretirement incomes. According to the Social Security Administration, Social Security retired worker benefits replace approximately 55% of the earnings of a career-long low-wage earner, 41% of the earnings of a career-long average-wage earner, and 27% of the earnings of a career-long high-wage earner. Average monthly Social Security benefits in 2007 are $1,044 for a retired worker and $1,712 for an elderly couple. As Figure 8 shows, 39% of all beneficiaries received less than $10,000 from Social Security in 2006 and just 6% received more than $20,000 in Social Security benefits. Table 2. Social Security as a Percentage of Income among Recipients Aged 65 and Older in 2006 Percent of Income from Social Security Less than 20% 20% to 39% 40% to 49% 50% to 69% 70% to 89% 90 to 99% 100% of income Recipients (thousands) 2,675 4,633 2,650 4,867 4,298 3,958 8,046 % of Recipients 8.6 14.9 8.5 15.6 13.8 12.7 25.9 Source: CRS analysis of the March 2007 Current Population Survey. Note: In 2006, 31.1 million people aged 65 or older received income from Social Security, and 4.9 million people had no Social Security income. CRS-11 Figure 8. Amount of Social Security Income in 2006 40% 38% 35% Percentage of recipients age 65+ 31% 30% 25% 20% 18% 15% 10% 8% 6% 5% 0% Less than $5,000 $5,000 to $9,999 $10,000 to $14,999 $15,000 to $19,999 $20,000+ 2006 Income from Social Security Source: CRS analysis of the March 2007 Current Population Survey. Pensions Since the late 1970s, the proportion of American workers who participate in employer-sponsored retirement plans has remained fairly stable at about half of the workforce. The Department of Labor’s National Compensation Survey reports that in March 2007, 51% of all private-sector workers participated in an employersponsored retirement plan of some kind; however, a point-in-time snapshot of pension participation is a poor indicator of who will receive pension income in retirement. Some workers not covered by a pension plan today may have earned a pension at a previous job, or they may earn a pension benefit in the future. Others who are currently participating in a pension plan may never fully vest in their pension benefit, or they might take their accrued benefit as a lump sum before retirement and spend all or part of the distribution.6 To receive pension income in retirement, an individual must remain a participant in the plan long enough to earn a pension benefit and must not spend the accrued benefit before retirement. In 1986, Congress shortened the maximum vesting period ( the length of time it takes to earn a pension benefit) from 10 years to 5 years, thus making it easier for employees whose employer sponsors a pension to earn a benefit under the plan.7 On the other hand, many employers offer separating 6 To vest in a pension or other benefit is to earn a legally enforceable right to receive it. 7 Tax Reform Act of 1986, P.L. 99-514. The Pension Protection Act of 2006 (P.L. 109-280) (continued...) CRS-12 employees the opportunity to take their accrued retirement benefit as a lump-sum distribution. Most defined contribution plans, such as those authorized under §401(k) of the Internal Revenue Code as well as a growing number of defined benefit plans, now permit departing employees to take a lump-sum distribution. Many employees roll these distributions into another employer-sponsored retirement plan or into an individual retirement account, but some spend all or part of the distribution, thus reducing their future retirement income.8 In 2006, 12.5 million people aged 65 and older — 34.7% of that age group — received income from a private or public pension.9 Of this number, 4.1 million had income from a public-sector pension — that is, from previous employment in the federal, state, or local government — and 8.5 million received income from privatesector pension plans.10 Together, the federal, state, and local governments account for only about one-seventh of all jobs in the United States. In 2006, for example, only 14% of all workers in the United States were employed by the federal, state, and local governments. Nevertheless, one-third of pension recipients aged 65 and older received income from government-sponsored pension plans. The disparity between the percentage of jobs that are in the government sector and the percentage of retirees with government pensions is accounted for mainly by two factors, both of which make it more likely that a government employee will earn a pension benefit than will a worker in the private sector. First, more government jobs than private-sector jobs offer pension benefits to their employees. In 2006, 80% of all government employees worked at jobs that offered retirement benefits, compared with 60% of private-sector employees whose employers sponsored retirement plans. Second, government employees tend to stay in their jobs longer than private-sector workers, making it more likely that the government employee will fully vest in the pension benefits he or she has earned. The Department of Labor reports that in January 2006, the median tenure of government workers with their current employer was nearly double the median tenure of workers in the private sector. Public-sector employees had a median tenure of 6.9 years, while private-sector workers had a median tenure of 3.6 years.11 7 (...continued) further reduced the maximum vesting period in many plans to three years. 8 See CRS Report RL30496, Pension Issues: Lump-sum Distributions and Retirement Income Security, by Patrick Purcell. 9 As reported here, “pension income” includes payments from a company or union pension, payments from a federal, state, or local government pension, military retirement pay, regular payments from an annuity or paid-up insurance policy, and regular payments from an IRA, Keogh account, or a §401(k)-type account. 10 11 These numbers sum to 12.6 million. About 300,000 people had both types of pension. U.S. Department of Labor, Bureau of Labor Statistics, news release USDL 06-1563, Employee Tenure in 2006, September 8, 2006, at [ftp://ftp.bls.gov/pub/news.release/ tenure.txt]. CRS-13 Figure 9. Income from Public and Private Pensions in 2006 Percentage of pension recipients age 65+ 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Less than $5,000 $5,000 to $9,999 $10,000 to $14,999 $15,000 to $19,999 $20,000 to $29,999 $30,000 or more Income from pensions in 2006 Public Pensions Private Pensions Source: CRS analysis of the March 2007 Current Population Survey. Public-sector employees not only are more likely to receive a pension in retirement than are workers in the private-sector; they also receive larger pensions than those who worked in the private sector. Among the 4.1 million people aged 65 and older who reported income from a government pension in 2006, the median annual amount was $14,400. Fifteen percent of government pension recipients reported that their pension income was less than $5,000 in 2006, while 21% reported pension income of more than $30,000. (See Figure 9) Among the 8.5 million people aged 65 and older who reported income from a private-sector pension in 2006, the median annual amount was $7,200. Thirty-nine percent of private pension recipients reported that their pension income was less than $5,000 in 2006 and 7% reported pension income of more than $30,000. CRS-14 Two Types of Pension Plans Over the past 25 years, there has been a shift in the distribution of retirement plans and of plan participants from defined benefit plans to defined contribution plans. A defined benefit or “DB” plan usually pays as a lifelong annuity based on the employee’s length of service and average salary. Most DB plans are funded entirely by employer contributions and investment earnings. Defined contribution or “DC” plans are much like savings accounts maintained by employers on behalf of each participating employee. The employer contributes a specific dollar amount or percentage of pay, which is invested in stocks, bonds, or other assets. The employee usually contributes to the plan, too. In a DC plan, it is the employee who bears the investment risk. At retirement, the balance in the account is the sum of all contributions plus interest, dividends, and capital gains — or losses. The account balance is usually distributed as a single lump sum. Many large employers recently have converted their traditional DB pensions to hybrid plans that have characteristics of both DB and DC plans, the most popular of which has been the cash balance plan. In a cash balance plan, the benefit is defined in terms of an account balance. The employer makes contributions to the plan and pays interest on the accumulated balance. However, these account balances are merely bookkeeping devices. They are not individual accounts owned by the participants. Legally, therefore, a cash balance plan is a defined benefit plan. Income from Assets Many Americans prepare for retirement by saving and investing some of their income while they are working. Of the 36.0 million Americans aged 65 or older who were living in households in 2006, 19.4 million (54%) received income from assets (interest, dividends, rent, and royalties). Most received small amounts: half of those who had income from assets in 2006 received less than $1,685. The data displayed in Figure 10 show that low-income individuals were less likely to have received income from assets. Among individuals aged 65 or older whose total income in 2006 was less than $10,000, 34% had asset income. In contrast, of those whose total income was more than $50,000, 84% had asset income. CRS-15 Figure 10. Percentage of People Aged 65 and Older with Income from Assets, by Total Income in 2006 100% 90% Percentage of people 80% 70% 60% 50% 40% 30% 20% 10% 0% Less than $10,000 $10,000 to $19,999 $20,000 to $29,999 $30,000 to $49,999 $50,000 or more Total income in 2006 from all sources Without Income from Assets With Income from Assets Source: CRS analysis of the March 2007 Current Population Survey. Median income from assets also differed between the lower-income and higherincome elderly. Among people 65 and older with total annual incomes under $10,000 in 2006, the median amount of asset income was only $338. For individuals with total annual incomes between $10,000 and $19,999 — accounting for more than one- third of all persons aged 65 and older with any income — the median amount of asset income in 2006 was $976. (See Table 3.) Those with the highest total incomes were more likely to have income from assets, and they also received higher amounts. Eighty-four percent of individuals with total incomes of $50,000 or more received asset income in 2006. Their median income from assets was $11,495. CRS-16 Table 3. Income from Assets Among People 65 and Older, 2006 Total Income, 2006 Less than $5,000 Number of People (thousands) 1,553 Percent with Asset Income 41.7% Mean Asset Income $617 Median Asset Income $227 $5,000 to $9,999 6,499 32.1 1,079 400 $10,000 to $19,999 12,112 48.1 2,251 976 $20,000 to $29,000 5,816 66.7 4,105 2,000 $30,000 to $49,999 4,532 73.4 6,510 3,000 $50,000 or more 4,310 83.8 24,473 11,495 34,822 55.6 $7,317 All persons with any income12 $1,685 Source: CRS analysis of the March 2007 Current Population Survey. Work-Related Income13 Earnings While some Americans continue to work into their 60s and beyond, the labor force participation rate of older individuals drops dramatically as they age. Although there was a trend toward earlier retirement from about 1960 to 1985, the trend for the past 20 years has been that more Americans have continued to work at older ages.14 In March 2007, 81% of men and 70% of women age 55 were working either full-time or part-time. Of those age 60, 66% of men and 54% of women were employed. Among 65-year olds, 43% of men and 31% of women were employed in March 2007. While the share of older Americans who work declines rapidly after age 65, Figure 11 shows that 24% of men and 17% of women who were 70 years old in March 2007 were still working. Despite the trend to longer working lives, people are progressively less likely to work as they pass age 55 and the average annual earnings of those who continue to work begin to decline at about the same age. This decline can be attributed to two factors: decreases in wages and decreases in the number of hours worked.15, 16 In 12 Of 36.036 million individuals aged 65 and older in 2006, 34.822 million (96.6%) reported income from one or more sources and 19.367 million (53.7%) reported income from assets. 13 Because labor force participation rates begin to fall steadily beginning at about age 55, this section includes information on individuals age 55 and older rather than aged 65 and older. 14 Joseph Quinn, “Retirement Trends and Patterns Among Older American Workers” in Stuart Altman and David Shactman (eds.), Policies for an Aging Society (Baltimore: Johns Hopkins University Press, 2002), pp. 293-315. 15 As a worker ages, the likelihood that he or she will experience a decline in physical or (continued...) CRS-17 2006, the median earnings of workers aged 55-61 were $37,000, while median earnings of workers aged 62-64 were $30,000. For those over age 65 who continued working, median earnings were $19,000 in 2006. Figure 12 shows the decline in workers’ annual earnings as they age. At the top of the earnings scale, 37% of workers aged 55-61 earned $50,000 or more in 2006, while only 20% of those aged 65 or older had earned income totaling more than $50,000 in that year. In contrast, while only 9% of Americans aged 55-61 who worked in 2006 had total earnings of less than $10,000, 30% of workers aged 65 or older had earnings of $10,000 or less. Figure 11. Employment Rates by Age and Sex, March 2007 90% 81% 80% 70% Percentage employed 70% 60% 66% 54% 50% 43% 40% 31% 30% 24% 17% 20% 19% 11% 10% 0% 55 60 65 70 75 Age Men Women Source: CRS analysis of the March 2007 Current Population Survey. 15 (...continued) cognitive capacity increases. Increased incidences of illness and disability are partly responsible for the decline in earned income that some workers experience after age 55. For a discussion of the effects of aging on the ability to continue working, see C. Schooler, L. Caplan, and G. Oates, “Aging and Work: An Overview,” in Impact of Work on Older Adults, K.W. Schaie and C. Schooler, eds. (New York: Springer Publishing, Inc., 1997). 16 For more information on the labor force participation of older workers, see CRS Report RL30629, Older Workers: Employment and Retirement Trends, by Patrick Purcell. CRS-18 Figure 12. Earned Income by Age, 2006 100% 90% Percentage of Earners 80% 70% 60% 50% 40% 30% 20% 10% 0% Age 55-61 Age 62-64 Age 65+ Age Group Less than $10,000 $10,000 to $29,999 $30,000 to $49,999 $50,000 or more Source: CRS analysis of the March 2007 Current Population Survey. Unemployment Compensation Unemployment Compensation (UC) is provided through a joint federal-state system that provides temporary, partial wage replacement to active job seekers who are involuntarily out of work. In 2006, one million individuals age 55 and older, or about 1.5% of people in this age group, received income from unemployment insurance at some time during the year. Most received UC benefits for six months or less. The median amount of unemployment compensation received by individuals 55 and older was $3,000. The percentage of individuals receiving unemployment compensation decreases with age. One reason for this is that older workers are less likely to be unemployed than younger workers. Also, as workers age they are more likely to be eligible for other sources of income, such as pensions and Social Security. In addition, the unemployment benefit an individual receives usually is reduced by the amount of other income he or she receives.17 This can make the UC benefit particularly small for those aged 65 and older. Although older workers are less likely to be unemployed 17 Federal law (P.L. 96-364) requires that when the earnings from an employer are used to calculate the UC benefit, the UC benefit must be reduced if retirement income is received from that employer. States are permitted to reduce benefits on less than a dollar-for-dollar basis by taking into account the contributions made by the worker to finance the plan. Also, the requirement applies only to those payments made on a periodic (not lump-sum) basis. This is to ensure that workers who retire do not also collect UC benefits from the job from which they retired. CRS-19 than younger workers, studies suggest that they take longer to find a new job. Consequently, older workers are more likely than younger workers to exhaust their UC benefits, which typically are limited to 26 weeks.18 Workers’ Compensation Workers’ compensation provides income replacement and medical benefits to workers who become disabled by work-related injuries and diseases or, in cases of death, their dependents. Workers’ compensation benefits are set by state legislatures and the benefit formulas differ from state to state. The benefit generally provides partial wage-replacement for temporary and partial disability, as well as long-term disability.19 In 2006, 440,000 individuals age 55 and older received income through workers’ compensation. While few individuals receive workers’ compensation benefits after age 65, for those who do, it represents a substantial source of income. For the 440,000 people age 55 and older who received workers’ compensation in 2006, the median annual benefit was $8,440.20 Income from Veterans’ Compensation and Veterans’ Pensions Disabled veterans, their dependents, and survivors are eligible for an array of benefits including income support, medical services, educational benefits and housing assistance. In 2006, 1.0 million Americans aged 65 and older received supplementary income from two disability-based programs: the veterans’ compensation and veterans’ pensions program. Taken together, the median veterans’ compensation or pension benefit was $7,630 in 2006. Three-quarters of recipients received compensation or pension benefits of $14,580 or less. The veteran’s compensation program provides payments for veterans with disabilities incurred or aggravated while in the Armed Forces. The compensation program provides payments to disabled veterans in amounts designed to compensate the veteran for loss of earnings capacity. Higher benefits are paid for more severe disabilities than for less severe disabilities. Veterans’ pensions are provided through a separate program to wartime veterans and their survivors who have disabilities which are not related to or caused by military duties of the veteran but which render them unable to work.21 Veterans’ pensions are means-tested: payments are decreased by amounts received from other sources such as Social Security, pensions, and 18 See CRS Report RL32111, Unemployment Compensation /Unemployment Insurance: Trends and Contributing Factors in UC Benefit Exhaustion, by Julie Whittaker. 19 For a more thorough discussion of workers’ compensation programs, see the House Committee on Ways and Means, committee print, WMCP: 108-6, 2004, 2004 Green Book, Chap. 15, [http://waysandmeans.house.gov/media/pdf/greenbook2003/WorkersComp.pdf]. 20 21 Figures include payments from employer-sponsored workers’ compensation insurance. Veteran’s pensions are means-tested benefits for low-income veterans, and should not be confused with military retirement benefits, also called “retired pay,” paid to retired officers and enlisted personnel who have completed at least 20 years of service. For this analysis, military retirement benefits are included as part of public pensions. CRS-20 income from a spouse. Pensions are not paid to veterans with substantial assets, and veterans’ pension benefits are usually small amounts. Income from Public Assistance An estimated 1.1 million Americans aged 65 or older received public assistance income in 2006. Most received Supplemental Security Income (SSI), a federal program for low-income individuals who are aged, blind, or disabled. Some who were the caretaker relatives of dependent children received income through Temporary Assistance for Needy Families (TANF), which is jointly administered by the federal and state governments and pays benefits to low-income families with children. A small number of elderly received state general assistance payments for those in poverty. The median public assistance payment from all sources to recipients aged 65 or older in 2006 was $4,368. The largest source of cash assistance for the elderly is SSI. SSI is a means-tested program administered by the Social Security Administration which provides monthly cash payments to eligible aged, blind, and disabled persons. Aged individuals and couples are eligible for SSI if their incomes fall below the federal maximum monthly SSI benefit. In 2006, the monthly standards were $603 for an individual and $904 for a couple. An individual does not have to be totally without income to be eligible for SSI benefits, but the income standards are significantly lower than the poverty threshold for both individuals and couples.22 Eligibility for SSI is restricted to qualified persons who have resources of less than $2,000 for an individual or $3,000 for a couple. The resource limit for a couple applies even if only one member of a couple is eligible. Together, these income and asset limits restrict the number of people 65 and older who are eligible for SSI to less than half of the number who have incomes below the federal poverty threshold. A state may choose to provide an optional supplement to Federal SSI payments. These supplements can help individuals meet needs which are not fully met by the federal payment. Each state determines whether it will make such a payment, to whom, and in what amount. Currently, all but six states make some form of SSI supplemental payments.23 22 In 2006, the poverty threshold for a single person aged 65 or older was $806 per month. For a couple in which one or both people were over 65, the monthly poverty threshold was $1,016. 23 Arkansas, Georgia, Kansas, Mississippi, Tennessee, and West Virginia pay no supplement. CRS-21 Conclusion Americans aged 65 and older receive income from a variety of sources. Although Social Security benefits, pensions, and income from assets are the most common income sources, earnings also are important, especially for those under age 70. There are large disparities in the amount and type of income that older Americans receive. Income from assets in the form of interest and dividends, for example, make up a significant percentage of the aggregate income of the elderly population. However, most elderly individuals receive only modest amounts of interest and dividend income and a relatively small number of people receive large amounts of income from these sources. Social Security, on the other hand, is both the largest source of aggregate income among the elderly and the biggest single source of income for a majority of Americans aged 65 and older. Compared to the great disparity in interest and dividend income, there is relatively little difference between the average monthly Social Security benefit and the highest monthly benefit. This is because the Social Security benefit formula limits the maximum amount paid to a retired high-wage earner to about 150% of the amount paid to an average-wage worker. Public assistance and other public programs play an important role in supporting many older Americans who otherwise would be living in poverty. The importance of each source of income varies across the income distribution. Public programs provide more than 90% of all income for the poorest 25% of the population. This contrasts with the wealthiest 25% of the elderly population who receive only onefifth of their income from public programs. The reduction in poverty among older Americans is one of the most significant public policy successes of the past half-century. Poverty among those aged 65 and older has fallen from one in three older persons in 1960 to fewer than one in ten today. Although the overall rate of poverty is relatively low, it remains high for women, minorities, the less-educated, single persons, and those over age 80. As Congress considers reforms to Social Security and the laws governing pensions and retirement savings plans, it may be helpful to consider how changes to one income source would affect each of the others, and thus the total income of older Americans. Future challenges will include maintaining the fiscal solvency of Social Security and Medicare and developing strategies in the public and private sectors to finance the increased need for long-term care services as the number of older Americans rises in the years ahead.