beyond this basic protection, especially for those in the upper wage and salary levels. The government in the past, through its tax provisions and integration rules for Social Security, has encouraged the expansion of these plans and this encouragement should continue. As most supplemental plans, in industry and local and state governments, are integrated with Social Security, a change in the wage base requires adjustments in the supplementary plans. It is important that the integration rules be not changed in a way which would discourage the continuation or expansion of these plans. Over the years the number of these plans and persons covered should gradually increase and the plans be put on a firmer financial base. Many municipal plans are in need of financial strengthening. In the meantime, steps should be taken to reduce the vesting periods under these retirement plans so that more workers would accumulate pension rights. Canada has set the example in making it compulsory for supplemental plans to provide a ten-year vesting period for those leaving after age 45. Over the past forty years the Nation has made tremendous progress in providing retirement and health protection for the aged through the three-way approach the individual, active employer assistance, and a broad governmental program. The Social Security contributory system has proved to be a sound foundation for this progress and upon which future progress can be achieved. It has also demonstrated how the social insurance principle can be used to provide greater protection of the wage earner and his dependents against other major economic hazards. In the search for measures to reduce poverty further and to provide income maintenance for those at the poverty level, careful study should be made of the advantages in expanding social insurance, which fits so well into our free incentive system. MARION B. FOLSOM.* HARVARD UNIVERSITY, DEPARTMENT OF ECONOMICS, DEAR SENATOR WILLIAMS: The Working Paper, Economics of Aging: Toward a Full Share in Abundance, is a very useful survey of the economic position of the aged. It makes it very clear that the incidence of poverty is high among the aged. And it poses the major public issues in a clear and general fashion. As your Committee moves ahead in this work, studying some issues in more detail as a background for future legislative proposals, let me call some particularly strategic economic issues to your attention. 1. What is the most effective and most desirable approach toward income maintenance for the aged? Should old age assistance be replaced by a generalized Social Security program-perhaps including some regional payment differentials to account for variations in the cost of living? Or should the role of old age assistance be diminished by including the aged in a universal minimum income allowance (negative income tax) plan? 2. What should be the role of direct services provided specifically for the aged? Apparently, public housing for the aged is a great success not only because of the rent subsidy but because of the associated special facilities and services. Should such programs be made available for the non-poor but with a more selffinancing basis? 3. Now that the Federal Government has taken over a large part of the financing of medical care for the aged, what structural changes in the provision of medical care should the Federal Government foster to assure that the extra financing actually produces better medical care for the nation? Initially, Medicare has certainly contributed to rising medical costs and has led to some redistribution of medical care from the non-aged to the aged. The Federal Government has not met the challenge on the supply side of medical care. 4. Given gradually increasing longevity, are we putting sufficient resources into research to prolong physical vigor in old age? 5. What should be government policy toward the choice of retirement age? Changes in the Social Security laws over the last ten years have encouraged earlier retirement, thus prolonging the period of inactivity and impairing the *Mr. Folsom is former Secretary of the U.S. Department of Health, Education, and Welfare. economic position of early retirees. This tendency toward a lower retirement age, which is of course part of a long run historical trend, was accelerated during the period of high unemployment from 1958 to 1965. In a fully employed economy, with ample job opportunities, it is less desirable to encourage earlier retirement. On the other hand, the technological changes and the decline of agriculture in the economy do leave some older workers unemployed and with little future job opportunity. Would it be wiser to change the Social Security system in a direction of not encouraging early retirement on a general basis, but devising special programs for older workers whose job opportunities have disappeared for technological or personal health reasons. In practical terms, this question requires examination of the retirement tests under Social Security, the benefit structure for early retirees, and consideration of possible new programs aimed specifically at the 55-65 year old worker with a long history of work experience. I hope you find these questions useful and I wish you the best of success in your forthcoming inquiries. Sincerely yours, OTTO ECKSTEIN. OHIO UNIVERSITY, DEPARTMENT OF ECONOMICS, Athens, Ohio, May 27, 1969. DEAR SENATOR WILLIAMS: Thank you very much for your kind invitation to respond to the Task Force document. I am enclosing a summary of my reaction to the material as you requested. I apologize for coming so close to the May 30 deadline but I did want to take as much time as possible in evaluating the working paper. I hope these remarks will be useful to your committee. As for items for inclusion in future examinations of the working of our income maintenance system for the aged I would like to see one possibility explored in some detail. This is whether it would be feasible to broaden the set of options available to the aged with respect to the age at which they retire both by extending the early retirement options (which have proved so popular) and by providing actuarial increments to Social Security benefits for those who postpone retiring beyond age 65. I honestly feel that policy modifications of this sort could move us much closer to an optimal income maintenance system for the aged. Again, I thank you very much for the opportunity to respond to the working paper. Sincerely, LOWELL E. GALLAWAY, Professor of Economics. REMARKS ON ECONOMICS OF AGING: TOWARD A FULL SHARE IN ABUNDANCE, BY The Task Force document is extremely thought-provoking. It paints a picture of a precipitous decline in the relative economic status of the aged through a series of comparisons and concludes from this that we are rapidly approaching a crisis situation in the area of income maintenance for the aged. This is an interesting conclusion and, if valid, argues that we must give serious thought to revamping our present system of providing income for the aged. Unfortunately, to my mind, the Task Force's findings are suspect on at least two counts. First, I feel that the evidence purporting to document the decline in the relative economic status of the aged over the past several years is quite weak. Second, it is my view that focusing solely on the behavior of money income levels of the aged presents a distorted view of the changes in their relative social welfare position in the United States. I will discuss these criticisms in the order in which I have voiced them. My first complaint concerns the failure of the Task Force to take into consideration the impact on the real income levels of the aged of the introduction of Medicare. Turning to Table 5 (page 17) of the Task Force report we observe that between 1960 and 1967 median income of aged families as a proportion of median income of non-aged families declined from 49.1 to 46.2 percent. However, if the addition of Medicare benefits is included as a component of income, this observed decline disappears. From material presented in the Task Force report I would estimate that on the average the addition of Medicare has led to an increase in real family income of the aged of about $250 a year. Incidentally, this is probably a minimum estimate. Addition of this amount to the median income of aged families raises their relative income to 49.1 percent which is exactly what it was in 1960. Consequently, a realistic appraisal of changes in the relative income position of the aged suggests that there has been little change since 1960. A similar adjustment for unrelated individuals indicates that their median income level in 1967 was about 44.5 percent of that of non-aged unrelated individuals. This is 3.5 percent higher than it was in 1960 although 2.7 percent lower than in 1962.1 Some additional evidence is offered by the Task Force to document the decline in the relative economic status of the aged. This is developed by comparing changes in the Bureau of Labor Statistics Retired Couple's Budget for a Moderate Living Standard (MLS) with changes in levels of Old Age Benefits (OAB) under Social Security. The conclusion which is drawn is that in 1950 OAB for a December retiree and his wife would have purchased about one-half of the budget while they would currently purchase only a third of the budget for that same couple. This seems to be imposing evidence of a relative decline in the economic status of the aged. However, again it is somewhat misleading. To demonstrate this I will rely on the material presented on page XIII of the Task Force report. The major difficulty with the conclusion advanced by the Task Force is that the MLS budget has risen over time much more rapidly than would be expected on the basis of increases in the general standard of living or increases in prices. Between December 1950 and December 1966 the MLS budget increased by 131 percent. During the same interval wage levels in the economy rose only 76 percent. If the MLS budget had increased by the same proportion as wage levels, it would have been only $263 instead of the $344 the Bureau of Labor Statistics reports. This would seem to indicate that changes in the MLS budget have been much more substantial than general advances in income over this period. This is somewhat misleading in that prices for the commodities purchased by the aged appear to have increased more rapidly than prices in general. Specifically, the Bureau of Labor Statistics indicates that about one-half of the increase in the MLS budget between 1950 and 1966 is due to price increases. This means that prices for the market basket of commodities purchased by the aged rose by about 50 percent whereas general price levels rose by only about 35 percent. After adjustment for these differential price level changes it can be estimated that the real increase in standard of living implied in the MLS budgets is in excess of 50 percent. By contrast, the change in real wage levels over the same period was only about 30 percent. Thus, the MLS budgets include increases in the real standard of living of the aged which are two-thirds greater than those enjoyed by the population as a whole. But, how can this be? Why has the MLS budget risen so much more rapidly in real terms than wage levels? The answer lies in the definition of the MLS budget. It is "intended to represent a measure of what retired couples themselves consider an appropriate level of living.” 2 I have deliberately italicized a part of the quote that has been cited to emphasize that it is the aged's own conception of what is a moderate standard of living that is determining in constructing this budget. Apparently, their perceptions of what is moderate have been shifting more rapidly than real living standards in the economy as a whole. This should not be so surprising. I suspect that it is generally true that people's conceptions of what is a moderate standard of living are very substantially affected by the standard of living they are currently enjoying. If this is true, it may well be that the more rapid increase in a real standard of living which is incorporated in the MLS budgets reflects nothing more than an improvement in the general standard of living of the aged. There is some evidence that this is precisely what has happened. For example, if we focus on the September-Decem 1 There may be some question as to which year is the appropriate one with which to compare 1967 levels of relative income of the aged. There seems to be some relationship between general levels of economic activity and the relative income position of the aged. Note that the relative income of the aged rises during years when aggregate unemployment is high (1961 and 1962) and falls steadily as the unemployment rate drops. This is probably due to income levels of the aged being less sensitive to variations in labor market conditions than income of the non-aged. Consequently, 1960 may be a more appropriate year to compare with 1967. 2 Economics of Aging: Toward a Full Share in Abundance, Special Committee on Aging. U.S. Senate, U.S. Government Printing Office, 1969, p. XIII. ber retiree in 1965, we find that his old age benefits under Social Security would purchase approximately one-half of the MLS budget for December 1966 almost exactly the situation faced by the 1950 retiree despite the more rapid increase in the real standard of living between 1950 and 1966 implied in these budgets. The calculations for the 1965 September-December retiree illustrate quite aptly what the fallacy is in making the type of comparison shown on pages XII and XIII of the Task Force report. Such a comparison focuses on changes in the relative economic position of the aged over the course of the full period of retirement rather than appraising changes over time in the average economic status of the aged during the retirement portion of their life. The type of comparison which is made is valuable for purposes of gaining insight into the stability of the relative income position of the aged throughout their retirement. However, it sheds little light on changes in the relative economic position of retirees who enter retirement at different points in time. For this type of comparison calculations such as those reported for the 1965 September-December retirees are required. To summarize my reaction to the MLS budget comparisons, I would make the following points: (1) The MLS budgets are relative in character in that they measure what the aged themselves consider to be a moderate standard of living." (2) Over time the real standard of living implied in the MLS budgets has increased more rapidly than the general standard of living in the economy. (3) Consequently, it is not surprising that the old age benefits under Social Security which are received by an individual who retires in, say, 1950 do not increase as rapidly as the MLS budget. Actually, if the real standard of living implied in the 1950 MLS is allowed to increase at the same rate as real wages and an adjustment is made for Medicare, the benefits in 1966 would purchase about 45 percent of the 1966 MLS budget. (4) A more appropriate type of comparison is what portion of the MLS can be purchased by old age benefits for people retiring at different points in time. When such comparisons are made there is no indication of any decline in the relative position of the aged. In fact, for the 1950 retiree old age benefits would buy 50 percent of the MLS while for the 1966 retiree they would buy somewhere between 50 and 55 percent of the MLS depending on which MLS is used. (5) Given the relative increase in the real standard of living implied in the MLS a strong argument can be made that the old age benefits received under Social Security will now purchase a higher standard of living relative to the economy as a whole for a current retiree than they would in 1950. If the 1966 MLS is adjusted to include the same increase in the real standard of living as took place in the economy as a whole between 1950 and 1966, the old age benefits received by a September-December 1965 retiree would buy 58 percent of the budget reported on page XIII of the Task Force document. (6) Nothing in what I have said to this point should be interpreted as maintaining that present living standards of the aged are satisfactory. I do not wish to pass judgment on this matter. However, I would seriously question the interpretations of the data found in the Task Force report which argue that there has been a serious deterioration in the relative income position of the aged in recent years. The magnitude of any such change has been seriously overstated by the report. I turn now to my second basic criticism of the Task Force report, namely, its overemphasis of money income comparisons in evaluating the economic status of the aged. Generally speaking, money income levels can be used satisfactorily as a measure of economic welfare assuming no significant changes in nonmonetary components of economic welfare. Unfortunately, in the case of the aged there may well have been some very significant changes in these non-monetary factors. I refer here to the very substantial decline in labor force participation among the aged. This decline is of the magnitude of about 20 percentage points for males in the post World War II period and has contributed very substantially to a decline in the relative money income position of the aged. The median income of families with an aged head expressed as a percent of that of families 3 Some indication of the extent to which they are relative is given by the fact that the MLS budget in December 1966 was $322 a month for couples living in a mortgagefree home and $344 a month for those living in rental housing. This suggests that possession of a mortgage-free home is worth only $22 a month. A more likely explanation Is that income levels of aged couples with a mortgage-free home are higher and, thus, their notion of what is a moderate standard of living is higher. with a non-aged head decreased from 58.3 percent in 1947 to 46.2 percent in 1967. The bulk of this decline took place between 1947 and 1960 (from 58.3 to 49.1 percent) and, as already noted, if a correction for Medicare is made, there has been no decrease since 1960. As I have indicated, the falling labor force participation rate of aged males is undoubtedly the prime cause of the declining relative income position of the aged. From the standpoint of interpreting the significance of the decrease in relative income levels, the crucial question is what has caused the drop in labor force participation among aged males. There are two basic views on this matter: (1) that which interprets it as being the result of increasing age discrimination in employment opportunities or (2) that which views it as reflecting a tendency on the part of the aged to voluntarily withdraw from the labor force in response to the presence of old age benefits available through the Social Security system. The Task Force document obviously adopts the first of these views while I have long been an advocate of the latter. Whichever view is accepted, there is strong evidence of a systematic negative relationship between labor force participation of the aged and the relative level of old age benefits. Two interpretations may be put on this evidence: if the increasing age discrimination argument is accepted, it would imply that as old age benefits rise relative to economy wide income levels employers are increasingly willing to discriminate against older workers and, consequently, they are forced out of the labor force. On the other hand, this evidence is quite consistent with the premise that the aged respond to higher levels of old age benefits by increasing the amount of leisure they wish to have at the expense of money income levels. The interesting aspect of this interpretation of post-World War II changes in labor force participation of the elderly is the voluntary nature of the choice which is made by the aged. This voluntary element suggests that the aged are happier, more satisfied, or what have you with a leisure-income mix which places greater emphasis on leisure. In effect, they can be viewed as substituting leisure for money income which results in a reduction in money income since leisure is not assigned a price in our economy. From the standpoint of evaluating the performance of our present system of income maintenance for the aged, the interpretation put on the evidence of a relationship between relative levels of old age benefits and aged labor force participation is critical. If it is viewed as indicating that increased availability of old age benefits leads employers to discriminate against the aged to a greater extent, the net effect of our Social Security system on the overall social welfare position of the aged may well have been negative. This is implied by their presumably being forced to accept a leisure-income mix which is less satisfactory to them than that which would exist in the absence of old age benefits. To me, acceptance of this interpretation of the evidence indicates a belief that the Social Security system has utterly failed to alleviate the problem of income maintenance for the aged and that the aged would have been better off without the system's ever having been devised. In all honesty, though, I simply cannot accept this line of reasoning. Rather, it appears to me that the Social Security system has made available to the aged a greater range of choice concerning their leisure-income mix and that sizable numbers of them have chosen to leave the labor force for what they consider to be a more satisfactory combination of leisure and income. In the process, it would seem evident that the overall social welfare position of the aged has improved. This I regard as the positive view of the performance of the Social Security system. At this point I feel I should summarize my remarks. Essentially, I have quarreled with the Task Force report on two counts: (1) its interpretation of the evidence with respect to the extent of the decline in the relative economic status of the aged and (2) its preoccupation with money levels of income and misinterpretation of the reasons for declining labor force participation among the aged. I find myself in the position of concluding that if I accepted the See my The_Retirement Decision: An Exploratory Essay, Social Security Administration, Research Report, No. 9, U.S. Government Printing Office, 1965 and "The Aged and the Extent of Poverty in the United States," Southern Economic Journal, October 1966, pp. 212-222. See my "Negative Income Tax Rates and the Elimination of Poverty: Reply," National Tax Journal, September 1967, pp. 338-343 for cross-section evidence based on the 1960 Census. For time series evidence see The Retirement Decision, op. cit., and "The Aged and the Extent of Poverty," op. cit. |