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With the 21st century only 20 years away, Congress and the American people must become aware of the problems for retirement that lie ahead. For several reasons it is particularly important that issues of income and employment of the elderly be fully understood and debated. First, we have entered an era of pension reform following 37 years (1935-72) of rapid growth in both public and private pension plans that greatly improved financial circumstances of the aged but also left important gaps and inadequacies. Second, there are numerous pressures to change retirement policies and pension systems, and such changes have profound effects on: Individual well-being and behavior; the circumstances of firms, unions, and governmental units; fiscal policy; financial markets; and the economy overall. Third, the pressures for change are in conflict, with no simple remedies in sight.

On the one hand, there are good reasons to improve pension coverage and benefits. Such pressures arise from individuals' seeking: -Greater replacement of preretirement earnings.

-Better protection from inflation.

-An end to poverty for the aged.

-Better opportunities to enhance postretirement income through secondary jobs.

-A fair break for working women; and

-Greater portability of pension credits for mobile workers.

On the other hand, resistance to such improvements results from a fiscal squeeze compounded by economic uncertainty. The fiscal problems are:

-Projections of a rapid rise in Federal spending on the aged due mainly to the aging of the population.

-A projected long-run deficit for social security.

-Financial difficulties of some State and local governments in meeting pension obligations; and

Rising costs of private pension plans due to requirements established by the Employee Retirement Income Security Act (ERISA).

The financing of pensions was easier during the 37 years of growth, with immature systems being funded by the contributions of a mushrooming population of young workers and a tremendous growth in the national economy. However, today there are no easy ways to relieve the pressure:

-Further tax increases will be strongly resisted at all levels of government.

-Reductions in the share of public spending for children and youth that would be expected as the population ages would not be sufficient to offset increased spending on the aged.

-Pressure to raise the normal retirement age will be resisted by the many people who look forward to early pensions.

-Possible savings from elimination of various "windfall" retirement benefits for the "pension elite," while substantial, could not alleviate by itself the fiscal constraints to major benefit improvements; and

-Legislative efforts to reduce the cost of social security or other public pensions through benefit reforms will engender hard fought political battles.

While major legislation to achieve savings in social security disability benefits has been reported in the Senate and in the House, no major reforms in income security for the aged are likely to be considered seriously in this session of Congress. Instead, current attention has been focused on narrow changes in law while larger scale changes are the subject of task forces, commissions and academic study. Thus, in the short run, proposals for modest adjustments in benefit rules will likely be the center of attention. Major action, such as a new approach to social security financing, reform of the treatment of women under social security, or Federal regulation of public employee pensions, will undoubtedly await consideration of the findings of the President's Pension Policy Commission, the National Commission on Social Security, the Social Security Advisory Council, and the HEW Task Force on Social Security Universal Coverage. (The last two groups have already issued reports.) The issues discussed in the following pages will likely constitute the central themes of the coming policy debate.

This chapter is organized around 12 major policy issues, selected for their breadth as public policy concerns and for their impact on the aged. While certainly not the only way to identify and organize the issues of interest, this structure provides a useful framework within which to discuss: (1) The significance of each issue; (2) its legislative context; (3) how it relates to other major issues; and (4) the underlying policy issues and research questions important in its eventual resolution by policymakers.

These 12 major issue areas discussed in this chapter are delineated in terms that reflect the primary concerns voiced in public debate, although different (often opposite) perspectives on each can certainly be taken. The 12 issues are stated as follows:

Issues of benefit adequacy and fairness:

A. Are retirement incomes and benefits for the aged inadequate? B. Are subgroups of the retired and aged treated unfairly relative to others?

Financial issues:

C. Are retirement systems and pension plans adequately funded? D. How should the cost of providing for retirement income be shared?

E. Do pension plans discourage saving and investment?

F. Will an aging population necessitate an increase in government

Employment issues:

G. Should individuals' working lives extend to older ages?

H. Will critical labor market scarcities and/or surpluses result from present policies and trends?

Issues of system coordination and design:

I. Should the present mix of public and private provision for retirement income be changed?

J. Should Federal control be extended over public employee retirement plans?

K. Should the social insurance approach to old age income security be revised?

L. How should major changes in retirement policies and benefit systems be implemented?

This structuring of policy issues should be helpful in understanding the full spectrum of policy issues relevant to income and employment for the aged and their interrelationships.

I. ISSUES OF BENEFIT ADEQUACY AND FAIRNESS A. ARE RETIREMENT INCOMES AND BENEFITS FOR THE AGED INADEQUATE?

A study conducted by the Social Security Administration of new claimants for retirement benefits in 1968-70 showed that about a third of new beneficiaries age 65 were still receiving earned income, and a little over half received pension benefits from private or public employee plans. However, about one-third of newly retired social security beneficiaries had neither earnings nor pension benefits to supplement their social security checks (about 400,000 new retirees based on today's annual volume of new claimants). Over half the beneficiary group had asset income, but the median annual figure was only about $600. For all married-men beneficiaries surveyed and their spouses, 37 percent of their income was derived from earnings, 25 percent from social security, 20 percent from other pensions, and 13 percent from asset income. For age-65 claimants, those who received both social security and private pension benefits had 54 percent of average wages on their jobs of longest duration replaced. This ratio was less than 40 percent for 18 percent of these claimants, but over 70 percent for 17 percent of the claimants. (It was estimated that a 70 to 78 percent replacement rate would have fully replaced preretirement disposable income.)1

The absence of pension entitlement for many people over age 65, the inadequacy of social security as a full support for retirement, the limited amounts of private savings, and the failure of the welfare system to alleviate poverty fully have resulted in a sizable number of elderly who are poor. A study by the Congressional Budget Office has shown that, of the 16.1 million households with heads age 65 or older in 1976, 9.6 million were poor based on income from private sources, although social security income moved 6.1 million of these

"Reaching Retirement Age: Findings from a Survey of Newly Entitled Workers, 1968-70," Social Security research report No. 47, U.S. Department of Health, Education, and Welfare, Washington, D.C., No

households over the poverty line. Cash welfare and food benefits further reduced the number of poor households with aged heads from 3.5 to 2.3 million, but that still left 14 percent of aged households in poverty, and another 21 percent had incomes less than 1.5 times the poverty level. In contrast, for households with nonaged heads, the incidence of poverty and near-poverty was only 11 percent and 9 percent, respectively."

Existing long-term projections of retirement income deal more with the adequacy of its financing than its adequacy to support retirees and their families. Few household income projections have been completed that incorporate the 1977 social security amendments, and those projections have been necessarily limited by: (1) An overly simplistic simulation of private pension plans; (2) an inadequate representation of these plans' interaction with social security; (3) a limited exploration of the impact of different socioeconomic assumptions; and (4) a lack of analysis of changes in individuals' decisions about retirement versus employment. However, it is generally assumed that, given a continuation of current programs and economic trends, social security wage-replacement rates will not change much from present levels. The incidence of aged poverty should decline with real increases in social security benefits, but poverty income levels would still persist for a substantial share of the elderly, perhaps affecting larger absolute numbers of people when the "baby boom" generation reaches old age.

Likewise there is no guarantee that current programs left unchanged will ever yield a reasonable earnings-replacement rate in retirement. Indeed, the current distribution of retirement benefits could become more bimodal. As current systems mature, more middle- and upperincome workers may become multiple beneficiaries under uncoordinated public and private pension plans, while substantial numbers of less fortunate workers-including some who presently have middleclass incomes-may accumulate little or no private plan benefits to supplement social security.

The issue of adequacy may be subdivided into four policy questions: (1) Whether income available to persons already in old age is adequate; (2) whether income for new retirees and persons just reaching age 65 is adequate; (3) whether future income for the latter group and for future cohorts of retired/aged will be adequate; and (4) the converse issue of the extent to which people are being overpensioned.

1. DO TODAY'S AGED INDIVIDUALS HAVE ADEQUATE INCOMES? The goal of providing an "adequate income in retirement in accordance with the American standard of living" was set forth in title I of the Older Americans Act. A comparison of the income of families with members who are 65 years of age and older with that of younger families shows why the question of income adequacy of older Americans has received considerable attention. In 1975, the median income of single persons age 65 and older was $3,408, but the median income of single persons age 55-64 was $5,154, and that of single persons age 35-44 was $10,218. Thus, the median income of elderly single persons

"Poverty Study of Families Under Alternative Definitions of Income," Congressional Budget Office,

was just 66 percent and 33 percent, respectively, of the median income for these two younger age groups. A comparison of the income of twoperson families headed by individuals 65 years of age or older with younger two-person families for 1975 found that the median income of the older two-person families was $7,449, while it was $13,109 for two-person families headed by individuals aged 55-64 and $14,648 for two-person families whose heads were in the 45-54 age category. The ratios of the median income of older two-person families to the younger families' medians were 43 percent and 50 percent, respectively.3

These statistics suggest that the income of older Americans is inadequate relative to the income of the younger population. But such a conclusion may ignore an important complicating factor-a simple gross money income measure may not provide an accurate comparison of the overall economic well-being of these subgroups. Moon and Smolensky argue that the traditional money income measure of economic well-being is inappropriate because it does not measure a family's command over all goods and services.* Money income ignores or understates many resources available to families, such as net assets and eligibility for in-kind transfers. This limitation is particularly relevant when the money income measure is used to compare the retired population's standard of living with that of the nonretired population's standard of living. Both the income needs and the income resources of these groups differ.

Money income understates the economic well-being of retired persons for the following reasons:

-Tax liability. Surveys measure gross pretax income, but a large portion of the income of retired persons (social security, for example) is not taxable. In addition, nonearned income is not subject to the payroll tax.

-Availability of in-kind transfers. Many in-kind transfers, such as medicare health benefits, are available to most older Americans but not to many younger Americans, and these benefits are not counted as income.

-Liquid assets. Savings are an income resource which may be tapped in retirement.

-Home ownership. Retired persons often enjoy an implicit rent from their owner-occupied housing.

-Work-related expenses. Retired persons no longer must bear jobrelated expenses such as travel to work, union dues, health and retirement plan contributions.

-Child rearing. Retired families typically no longer bear expenses related to child rearing.

-Leisure as a resource. The increased leisure time of retired persons has an economic value that should be included in a measure of their well-being.

-Shared household arrangements. Some aged individuals share homes with relatives and experience economies in household expenses relative to typical young families living in their own homes.

This information and additional data are discussed more fully in Sheila Zedlewski, "Defining Retirement Income Adequacy," Urban Institute working paper 5903-03, March 1978.

Marilyn Moon and Eugene Smolensky, "Income, Economic Status and Policy Toward the Aged," Institute for Research on Poverty, University of Wisconsin (Madison), May 1976.

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