Senior Finances and the Great Entitlements Debate

The adequacy of retirement and safety nets will be a contentious and high-stakes numbers game.

By + More

The Great Entitlements Debate will move into high gear this year. The need to rein in government healthcare spending on Medicare and Medicaid is undeniable. But there is no political consensus over how severe the cuts should be or how quickly they should be implemented. There is also a related debate about Social Security. Its financial impact on U.S. deficits is, depending on how you measure it, either nonexistent or modest, at least compared with healthcare.

[See Deficit Crisis Threatens Once-Untouchable Tax Breaks.]

During these discussions, the financial welfare of older Americans is likely to be a centerpiece issue. The nation's rising sensitivity to income and wealth inequalities is not limited to the 1 percent versus the 99 percent. Are older generations sucking unfair amounts of money and wealth from the government and, at least indirectly, from younger generations? Or are they struggling with meager retirements, rising healthcare costs, and dismal futures? Here are some of the central studies and viewpoints that will be rolled out again and again as weapons.

Entitlements spending. AARP and other senior groups hammer away at attacks on programs by stressing that Medicare and especially, Social Security, are benefits that seniors paid for and simply deserve. It is almost as if it is the natural order of things.

The facts, however, tell a somewhat different story. Eugene Steurle and Stephanie Rennane at the nonprofit Urban Institute have studied the costs and benefits of Social Security and Medicare. Their conclusion is that seniors have paid for only some of their entitlements. The U.S. taxpayer is on the hook for a big piece of the cost of senior benefits, particularly for Medicare. And the public's share of the price tag is rising.

Their findings are hardly a scintillating read, but the message is clear. Payroll taxes for Social Security and Medicare are less than the benefits received by program beneficiaries, especially for people with lower lifetime earnings. Wealthier seniors are not likely to get nearly as much in benefits as they've paid in taxes. This doesn't mean the programs are too extravagant, just that they're not self-supporting and that seniors come out ahead. The debate here should not be about seniors getting back what they've paid, but how generous society can afford to be to them.

[See Social Security, Medicare a Bargain for Many.]

Poverty and wealth. In 2010, as the nation continued to struggle with recessionary conditions, the U.S. poverty rate was 15.1 percent, according to poverty statistics compiled by the Census Bureau. The rate for people age 65 and older was 9 percent. In 1959, several years before the Medicare program was enacted, the national poverty rate was 22 percent, but for older Americans it was 35 percent. There is no question that Social Security and Medicare have helped older Americans over the years.

"Since 2007, real median household income declined for all age groups except 65 and older," the Census Bureau found. "The income of this latter group increased by 5.5 percent between 2007 and 2010."

In a widely cited report last November, the Pew Research Center found that in 2009, Americans age 65 and older had 47 times the average wealth of households headed by someone aged 35 or younger—$170,494 versus $3,662. In 1984, by comparison, the ratio was only 10 to 1 in favor of seniors.

Less widely noted was the fact that older Americans should have a lot more wealth than younger households, or they would be in a sad state of retirement readiness. Nearly all surveys show that most older households are, in fact, facing increasingly deferred and austere retirements.

[See 10 Trends from 2011 We Don't Want to See in 2012.]

Most of that $170,494 in average senior wealth is in the form of home equity. The size of retirement nest eggs is much too small, on average, to support anything resembling an adequate retirement. Further, if older Americans are doing so well, why are record numbers of them continuing to work well past traditional retirement ages? And why has the notion of retirement simply disappeared from the plans of millions of seniors?

Alicia Munnell, the head of the Center for Retirement Research at Boston College, has an equally fact-filled explanation for how hard things have been, and will be, for retirees:

"Real wages have barely budged since 1979. The degree of income and wealth inequality is at levels not seen since the 1920s. Unemployment remains about 9 percent two years after the recession officially ended. Housing prices continue to drop. Those are problems that need to be addressed. And the answers are not going to be found by comparing the wealth of the old to the young."

Retirement adequacy. Every year, the Employee Benefit Research Institute (EBRI) conducts a retirement confidence survey. It provides a comprehensive financial and attitudinal look at the retirement prospects for older Americans. And every year, the nation gets failing marks on its retirement report card. We save too little money, invest it poorly, and are financially illiterate when it comes to understanding the money and planning needs of our later years. The recession has opened our eyes a bit to the harsh realities of those so-called Golden Years. But going from an "F" to a "D-minus" is not something to crow about.

Not everyone sees it that way. A study conducted by the Rand Corp. last year concluded that most retirees are in decent financial shape. The recession's big hits to investments and home prices were most pronounced in wealthier households and did not materially affect the retirement prospects for most seniors, it found.

Most retirement adequacy studies look at the percentage of preretirement spending that a retiree will be able to sustain during retirement. A benchmark is that having 80 percent of preretirement income during a person's retirement years will provide them an adequate retirement.

The Rand study, however, looked not at income replacement ratios, but at actual spending habits of older Americans. It found that seniors spend much less money in retirement and that spending continues to drop as they age. It factored in reduced spending needs when a spouse died. And it also reflected the value of government safety-net programs for low-income seniors. All in all, researchers Michael D. Hurd and Susann Rohwedder concluded, "We do not find inadequate preparation for retirement on average."

[See Retirement Woes May Be Exaggerated.]

Countering this view, a current EBRI study finds persuasive evidence that older Americans spend less money not because they want to, but because they're forced to. The study looks in detail at how retirees, even with Medicare, have been forced to reduce spending on healthcare.

"Not all declining spending at older ages is voluntary," it said. "Changes made in medical care, such as moving to cheaper generic drugs, skipping pills, reducing dosage, etc., and skipping or postponing doctor appointments to save money can be indicators of involuntary saving."

Twitter: @PhilMoeller