What Will Happen to Poverty Rates Among Older Americans in the Future and Why?

Brief #3 from the series Older Americans' Economic Security

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).

The text below is a portion of the complete document.

Poverty rates among the elderly have declined sharply over the past 50 years. Census data show that the fraction of Americans ages 65 and over with incomes below the poverty level declined from 35 percent in 1959 to just over 10 percent in 2002 (Bureau of the Census 2005). In contrast, the poverty rate for all Americans declined over the same period at a much slower rate, from 22 percent to 13 percent, making older Americans less likely than others to live in poverty. The expansion of the Social Security program has contributed significantly to lower poverty among older Americans; in 2002, Social Security benefits were 83 percent of income for Americans over age 65 in the bottom income quintile (Social Security Administration 2004). There is concern, however, that increasing earnings inequality among today's workers, higher divorce rates, the erosion of defined benefit pension plans, and a lower Social Security replacement rate could raise poverty rates among the elderly in the future.¹

Projecting Changes in Poverty Rates between 1990 and 2020

Using a broader definition of income than the Census Bureau uses for measuring poverty (because it includes the potential spend-down from assets), we project that the poverty rate for the age 62 and older population group will decline from 7.8 percent in the early 1990s to 4.2 percent in 2020.² The main source of the decline in poverty is the growth in real earnings, as projected by the Social Security Administration's Office of the Chief Actuary. Because increases in initial Social Security benefits are linked to the growth in average wages, annual Social Security benefits will increase over time in real terms, even though the increase in the normal retirement age will lower the percentage of earnings that benefits replace.

While poverty is projected to decline significantly, high poverty rates will persist among some groups. Groups that will remain at comparatively high risk of poverty include high school dropouts, blacks and Hispanics, never-married women and men, divorced women, and the oldest of the aged population.

Census thresholds for determining poverty are based on an absolute measure of a minimum standard of living at a point in time because they are indexed to the growth in the consumer price index. If poverty were defined in relation to prevailing living standards instead of an absolute level at a fixed point in time, then the thresholds for determining poverty-level income would be indexed to wages instead of prices. We define a wage-indexed poverty measure as a measure of relative poverty. The relative poverty rate measure shows how many people fall below an unchanging percentage of average real income, adjusted for family size, instead of an unchanging absolute real income level. The incidence of relative poverty, instead of decreasing, will increase from 7.8 percent of the 62 and older population in the early 1990s to 9.9 percent in 2020.

Notes from this section of the report

This brief is from a longer paper by Barbara Butrica, Karen Smith, and Eric Toder (2002).

1. The Social Security normal retirement age (NRA) is scheduled to gradually increase from 65 to 67. Future retirees who take up Social Security benefits before the NRA will experience lower replacement rates than their predecessors.

2. The simulations used the Social Security Administration's Model of Income in the Near Term (MINT) to project poverty rates for the 62 and older population in 2020. The Urban Institute contributed to the development of MINT and is currently refining and updating it. The model version for this analysis (MINT3) projects the wealth and income of individuals born between 1926 and 1965 from the early 1990s through 2032 and couples through 2020 (Toder et al. 2002).

Note: This report is available in its entirety in the Portable Document Format (PDF).

Usage and reprints: Most publications may be downloaded free of charge from the web site and may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact [email protected].

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.

Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute.