Rising Senior Wealth Not True for All

Reports showing older Americans faring well are averages that obscure a different reality for many.

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As the battle over reducing senior benefits comes to a head in the Congressional supercommittee, multiple pictures of senior financial needs and resources are being used to sway decisions. This often is the case when it comes to ideological arguments. Both sides make their strongest cases, and the truth is often a casualty of the process.

[See How the Supercommittee Deficit Plan May Affect Seniors.]

Many supporters of cuts to Medicare and Social Security note that seniors have the nation's lowest poverty rate and a disproportionately high share of wealth. While no one wants to cut these programs, they say, the nation just can't afford them any longer. Pointing to the poverty and wealth data, they add that seniors are well-positioned to absorb some benefit cuts.

Opponents of such cuts create a different profile of the nation's seniors. In this profile, seniors struggle to make ends meet. Poverty is getting worse, and many lower-income Americans depend on Social Security for all of their income. Reducing benefits or raising the cost of Medicare insurance would significantly reduce a quality of life that is already modest at best.

The Pew Research Center recently added a lot of wood to this fire with a report on the rising gap between the wealth of households headed by people at least 65 years of age and younger households. The gap, and its growth in recent years, was startling:

"In 2009 the typical household headed by someone in the older age group had 47 times as much net wealth as the typical household headed by someone in the younger age group–$170,494 versus $3,662 (all figures expressed in 2010 dollars). Back in 1984, this had been a less lopsided ten-to-one ratio. In absolute terms, the oldest households in 1984 had median net wealth $108,936 higher than that of the youngest households. In 2009, the gap had widened to $166,832."

[See For Seniors, There Are No Small Benefit Cuts.]

Dig a little further into the report, however, and it turns out that much of the material edge of older Americans is due to their fortuitous timing in buying their homes. Benefiting from the decades-long run-up in housing prices, older Americans have amassed a lot of wealth in their homes—so much, in fact, that they were able to weather the recent collapse in housing prices. Younger home buyers, in sharp contrast, were more likely to have bought their homes in recent years, enjoyed little appreciation, and took a huge hit when housing prices fell.

Without this real-estate benefit, Pew found, the wealth of older Americans would have plummeted. "If it had not been for home equity," its report said, "the median net worth of older American households in 2009 would have been 33 percent lower than that of older households in 1984, instead of 42 percent higher."

That's because other sources of wealth—income, investments, and pensions—have not fared well during the past 25 years. Social Security income, by contrast, has maintained its real value due to cost-of-living increases, and continues to provide about 55 percent of the typical senior's income.

Still, wealth is wealth, and housing wealth has always been a key component of our actual and psychological well-being.

[See How to Size Up Your Retirement Nest Egg.]

Another way of viewing the well-being of older Americans is by taking a close look at how they spend their money. The government does this with its annual consumer expenditure survey (CEX) which comes out each fall. Looking at the average household headed by someone aged 65 and older, annual spending was $36,802 in 2010, down 2 percent from $37,562 in 2009. That wasn't far off from the decline in annual spending by consumer households of all ages, which dipped to $48,109 in 2010 from $49,067 in 2009 and $50,486 in 2008. These figures are expressed in each year's respective dollar values, so the actual declines would have been larger in inflation-adjusted terms.

These are, again, averages. The CEX breaks down spending by income levels and age groups in a special set of two-year averages. Here is what the 2009 and 2010 average looks like for older Americans, compared with the 2007 and 2008 average, and the 2005 and 2006 average.

The lowest-income seniors clearly spent a lot more money than they earned, due to Medicaid and other health and income safety net programs. Clearly, there is very little, if any, wealth in these senior households.

Consumer Spending, 2005-2010, by Households Aged 65 and Older
  2009-2010 Spending 2007-2008 Spending 2005-2006 Spending
  Households Spending Households Spending Households Spending
All 65+ Households $24,570,000 $37,178 $23,731,000 $36,687 $22,927,000 $33,798
Annual Pretax Income % Households   % Households   % Households  
0 - $4,999 3.3% $24,030 3.2% $20,526 3.5% $18,370
$5,000 - $9,999 5.7% $17,486 6.4% $15,207 8.4% $14,035
$10,000 - $14,999 12.8% $18,751 14.2% $19,276 15.0% $17,788
$15,000 - $19,999 11.9% $23,577 12.7% $24,095 13.1% $22,550
$20,000 - $29,999 19.3% $29,211 19.9% $30,641 18.7% $28,453
$30,000 - $39,999 13.1% $36,724 11.9% $35,318 12.1% $32,886
$40,000 - $49,999 8.5% $38,392 8.2% $41,728 7.8% $39,709
$50,000 - $69,000 11.9% $49,855 10.2% $49,058 9.1% $48,028
$70,000 and more 13.4% $76,169 13.3% $78,014 12.3% $77,880

Moving up the income ladder, the pattern of spending changes is mixed going back to 2005 before the recession hit. Spending did not appear to shrink between the 2005-06 and 2007-08 periods, but there was more noticeable belt tightening in the 2009-10 time frame. Again, keep in mind that these figures are not adjusted for inflation. The purchasing power of 2009-10 dollars is less than it was in earlier years.

Twitter: @PhilMoeller