Deep material hardship among older Americans during the Great Depression was the main catalyst for the creation of the Social Security program. Hardship, however, continued for many years despite the new program. In1959 – 24 years after the Social Security Act – older Americans still faced widespread economic insecurity. Thirty-five percent of persons 65 or older were in poverty that year, more than twice the rate for adults under age 65.
Social Security’s ineffectiveness in its early years was the result of its small size. On its 15th anniversary, Social Security was still much smaller than the state-based welfare programs for older Americans. A decades-long policy expansion of coverage and benefit amounts under Social Security resulted in the large Social Security program that exists today. The official poverty rate for persons 65 or older, based on Current Population Survey data, now stands at 9.9 percent.
Despite America’s affluence and its fully developed social insurance programs, the image of the typical senior citizen as one who struggles to make ends meet has persisted in the minds of the public. In recent years, economist Andrew Biggs has challenged that image with a series of compelling scholarly papers, media articles, and presentations. Biggs, a senior fellow at the American Enterprise Institute, argues there is little evidence of a “retirement crisis” in America and that older Americans are generally doing well.
Other economists, most notably Alicia Munnell of Boston College, have a less sanguine view of the prospects of Americans during their later years.
Policymakers, however, should step back from the general debate of whether there is a retirement crisis and ask a more specific question: why are the retirement years a crisis for some senior citizens? It turns out the answer is largely related to disability.
Social Security provides disability benefits in addition to retirement benefits. At the full retirement age (currently age 67), Social Security reclassifies disability beneficiaries as retirement beneficiaries even though monthly benefit amounts do not change. Thus, many “retirees” in America are really disability beneficiaries. In fact, over the last 10 years, 15 percent of retirement benefits that have been “awarded” under Social Security are simply status changes that reclassify disability beneficiaries as retirement beneficiaries.
Based on data from the Survey of Income and Program Participation, these reclassified disability beneficiaries have relatively high rates of poverty and near poverty. About 17 percent are poor and 40.4 percent are poor or near poor. The figures for other Social Security beneficiaries of retirement age are only 5.7 and 14.8 percent, respectively. Poverty measures are imperfect, but the pattern also shows up in direct measures of material hardship. About 29 percent of reclassified disability beneficiaries report difficulty affording food, housing, or utilities compared to only 11 percent for other Social Security beneficiaries.
Wealth is also much lower among reclassified disability beneficiaries. Median net worth among this group is only about $38,000 as compared to $236,000 for other Social Security beneficiaries of retirement age. The onset of severe health problems almost certainly impedes the accumulation of wealth.
Reclassified disability beneficiaries make up 15 percent of individuals awarded retirement benefits, but the percentage of Americans that arrive in their later years with a history of poor health and limited resources may well be much larger. This is because most disability applications are denied by Social Security, even though denied applicants have severe health problems and high rates of poverty and near poverty.
What does this mean for the debate over retirement security? Social Security is a mature program and generally provides a level of benefits that prevents widespread hardship among the country’s seniors. Seniors who fall through the cracks are often persons whose careers were cut short by disability. These individuals will have difficulty accumulating wealth (and generating late-life asset income) and, further, will have little ability to supplement income at older ages through work and earnings.
Policymakers wishing to make continued progress on improving the economic security of older Americans should, perhaps, focus on improving Social Security’s disability program. Higher benefit levels, policies to support a return-to-work for both approved and denied disability applicants, and efforts to encourage asset building would have downstream effects on retirement security.
Further, at this point in the policy history of old-age security, policymakers may want to specifically target low-income seniors by improving the Supplemental Security Income (SSI) program. SSI, which grew out of the old state-based welfare programs, pays a very low federal benefit to disabled persons and persons 65 or older. Bringing the benefit amount to the official poverty level is probably the most efficient way for America to move in the direction of eliminating poverty among seniors and persons with disabilities.
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