Forget the Wealth Gap, It's the Age/Income Gap

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The Census Bureau has just released a supplementary measure of poverty for 2010. It finds that more Americans were in poverty than under the standard measure. Americans aged 65 and older showed the largest increase in poverty rates under the supplemental measure.

On Monday, the very day the Census Report came out, the Pew Research Center issued some numbers of its own about well-being and poverty. It reported that the gap in well-being between the young and the old is greater than ever before, with older Americans doing better than in the past and younger ones doing worse.

Which one is right?

The major difference is that the Pew measure includes assets. Older Americans have benefited from appreciation of their homes, higher incomes, and lower unemployment rates. When these factors are taken into account, older Americans come out ahead of younger Americans.

Let's take a look at the new Census Bureau metric, the Supplemental Poverty Measure. It is, in my view, superior to the traditional measure because it accounts for several more sources of income that are available to the poor. It also adjusts for work-related expenses and health care expenditures.

The new Census measure, first published for 2009, does not replace the traditional measure, used since 1969 and issued every August. The Bureau will continue to issue the old measure of poverty annually to calculate eligibility for means-tested government benefits and will also calculate poverty rates in the new way.

Some of the major differences between the two Census measures:

Broader Income Measures. The supplemental measure adds to cash income the value of the earned-income tax credit, food stamps, government-subsidized school lunches, and income supplements for housing and energy.

Broader Expenditure Calculation. The supplemental measure subtracts from income taxes paid, work-related expenses such as transportation, child-care, child support, and out-of-pocket medical expenses.

Geographic Differences in Prices. The new measure adjusts for differences in the cost of housing in different states.

Different Definition of Family. The new measure broadens the definition of family to include unmarried partners who live in the same dwelling, foster children, and elderly parents.

Using the supplementary measure, 16 percent of the population was in poverty in 2010, compared to 15.2 percent under the usual measure.

It turns out that the largest factor affecting the poverty rate is the subtraction for medical expenses. Without subtracting medical expenses from income, the new poverty rate would be 12.7 percent instead of 16 percent.

That's why the new Census measure shows that more Americans 65 and older were in poverty in 2010-15.9 percent, rather than 9 percent in the traditional measure. Older Americans spend more money on medical expenses, and so they appear to be worse off.

But this view of older Americans is misleading, because neither of the poverty measures include assets. True, older Americans have low incomes, but many have substantial assets.

This is highlighted in the new Pew report entitled "The Rising Age Gap in Economic Well-Being," which shows that, due to asset accumulation, older Americans are doing better than younger ones.

According to Pew, between 1984 and 2009, median net worth fell by 68 percent for households headed by adults younger than 35, and rose by 42 percent for households headed by those over 65. (Net worth is the value of assets less debt.)

The older age group had 47 times the net wealth of the younger group in 2009, compared to a multiple of 10 a quarter century earlier. It's not surprising that older people have more wealth, because they have been saving longer and building the equity in homes they own.

That the ratio has risen so much is a result of contraction of net worth among the young and expansion for the oldsters.

Older Americans who bought houses or condos have seen their home equity rise because they have held their homes for longer periods of time. The 2009 American Housing Survey reports that 50 percent of older Americans bought their homes before 1986, and 65 percent own their homes free of mortgages.

In contrast, younger Americans who own homes have seen them decline in value, particularly if they bought them during the housing boom of the previous decade.

As well as assets, Pew reports that incomes of older Americans have risen four times as fast as incomes of younger Americans. Compared to 1967, incomes of Americans 65 and older have risen by 109 percent, after adjusting for inflation, but incomes of adult Americans under 35 have risen by a far smaller amount, 27 percent.

The recession of 2008-2009 and subsequent weak recovery have been especially hard on younger workers. The inflation-adjusted median income of older Americans rose by 8 percent between 2005 and 2010, but the income of younger Americans declined by 4 percent.

Employment has increased among older workers over the past decade from 12 percent to 16 percent. But it has declined among younger workers, from 78 percent to 69 percent.

Since the Census Bureau started publishing measures of poverty in the 1960s, our understanding of the concepts of poverty has changed. As well as better measures of income and spending, we also need to include measures of assets and employment. Then, we need to figure out how to make younger people better off.



Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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