Estimates of the income and wealth of the elderly using the panel study of income dynamics and the survey of consumer finances and their implications for long-term care

183 Pages·1996·6.9 MB·English

by  Coleman, Kevin A

THE LEWIN GROUP
ESTIMATESOFTHEINCOMEAND WEALTH
OFTHEELDERLYUSING THEPANEL
STUDYOFINCOMEDYNAMICSANDTHE
SURVEYOFCONSUMERFINANCESAND
THEIRIMPLICATIONSFOR
LONG-TERMCARE
FINALREPORT
Submittedto:
HEALTHCAREFINANCINGADMINISTRATION
Submittedby:
KevinA.Coleman
TimothyM.Dall
THELEWINGROUP
Revised:
June12, 1996
Fairfax.Virginia
Sausaino,California
TABLEOFCONTENTS
Page
EXECUTIVESUMMARY
i
ChapterOne:OverviewoftheLiteratureontheEconomic
StatusoftheElderly i
A. TheEmpiricalLiterature i
B. TheTheoreticalLiterature Hi
ChapterTwo:EstimatesoftheIncomeandAssetsoftheElderly iv
A. Income iv
B. WealthandAssets v
C. TheAffordabilityofLong-TermCare vi
ChapterThree:SimulationResults vi
CHAPTERONE: OVERVIEWOFTHELITERATUREONTHEECONOMIC
STATUSOFTHEELDERLY 1
I. Overview 1
II. TheCurrentEconomicStatusoftheElderly 1
A. HowistheEconomicStatusoftheElderlyMeasured? 1
B. CurrentMeasuresofElderlyEconomicStatus 3
C. ThereisConsiderableDiversityintheIncomesandWealthofthe
Elderly 4
D. ElderlyPovertyisaMajorConcern 7
E. TheElderly'sRisksofIncurringCatastrophicMedicalExpensesAre
High 7
II. TheoriesExplainingtheSavingsBehavioroftheElderly 9
A. TheLifeCycleTheory 9
B. ThePrecautionaryMotiveTheory 12
Page
C. TheBequestMotiveTheory 14
CHAPTERTWO: ESTIMATESOFTHEINCOMEANDASSETSOFTHE
ELDERLYFROMTHEPANELSTUDYOFINCOME
DYNAMICSANDTHESURVEYOFCONSUMER
FINANCES 21
I. Overview 21
II. DescriptionoftheData 22
A. ThePanelStudyofIncomeDynamics 23
B. TheSurveyofConsumerFinances 25
C. OtherDataSources 27
III. TheIncomeoftheElderly 30
A. IncomebyHouseholdCharacteristics 31
B. TheIncomeoftheElderlybySourceofIncome 36
IV. TheWealthandAssetsoftheElderly 48
A. NetWorthbyAge 49
B. TheTypesofAssetsOwnedbyIndividualsAge55andOlder 55
C. TheCorrelationBetweenIncomeandAssets 60
V. UsingthePSIDandSCFtoEstimatetheAbilityoftheElderlytoPurchase
Long-TermCare 63
VI. Conclusions 65
CHAPTERTHREE: SIMULATIONRESULTS 67
I. TheModel 68
A. SpecifyingtheModel 68
B. TechnicalIssuesandProblems 70
II. Results 72
A. Overview 72
Page
B. Findings 73
III. Conclusions 81
BIBLIOGRAPHY 90
APPENDIXA: SPECIFYINGTHESIMULATIONMODEL
APPENDIXB: INCOMEANDASSETTABLES
EXECUTIVESUMMARY
TheHealthCareFinancingAdministration(HCFA)contractedwithLewin-VHIfor
atwopartstudyoftheincomeandwealthoftheelderly. Thefirstpartofthisstudy
consistedofadetailedreviewoftheliterature.1 Aspartofthisreview,wedetermined
severalofthegapsinthecurrentempiricalliteratureinvestigatingtheincomeand
wealthoftheelderly. Tohelpfillsomeofthesegaps,thesecondpartofthisstudy
usedtworecentdatasources,the1983to1992SurveyofConsumerFinances,and
the1983to1991PanelStudyofIncomeDynamics(PSID)toprovideupdated
estimatesoftheincomeandwealthoftheelderly. Thispaperdescribestheresultsof
thesecondpartofthisstudy.
Below,webrieflyreviewourprincipalfindingsfromthethreechaptersinthe
secondpartofourstudy. InChapterOne,wesummarizethemajorpointsofour
previousliteraturereview. InChapterTwo,wediscussourdetailedempiricalestimates
ofelderlyincomeandwealthmeasures.Finally,inChapterThreewereportthefindings
ofasimulationmodelthatusesdatafromthePSIDtoestimatechangesinelderly
wealththroughtime.
ChapterOne: OverviewoftheLiteratureontheEconomicStatusoftheElderly
A. TheEmpiricalLiterature
Beforeproceedingwithanydiscussionofempiricalestimatesoftheeconomic
statusoftheelderly(personsorhouseholdsheadedbysomeoneage65andover),itis
importanttodefinewhatonemeansby"economicstatus." Therearethreeissues
worthnoting:
1 KevinA.ColemanandTimothyM.Dall,SynthesisoftheIncomeandWealthoftheElderly:
ImplicationsforLongTermCare,submittedtotheHealthCareFinancingAdministration,by
Lewin-VHI,June20,1995.
• whatvariablesareusedtomeasureeconomicwelfare-economistsusually
equateeconomicwelfarewithconsumption. Unfortunately,consumptiondataare
sparse,leadingresearcherstouseincomeandwealthasproxiesforconsumption.
• theframeofreference-theeconomicstatusofonegroup(here,theelderly)can
becomparedtotheeconomicstatusofothergroupsatthesamepointintime(e.g.,
thenon-elderly)orbycomparingthesamegroupatseveralpointsintime(perhaps
comparingthecurrentelderlybeforeandaftertheyretire).
• howtomeasurethesevariables-differentstudiesmayusemeans,medians,or
othermeasuresofcentraltendency,whileothersmayuseincomeandwealth
measurestodefineotherconcepts,suchasmeasuresofrisk(i.e.,howstableisthe
currenteconomicstatusoftheelderly).
Mostempiricalstudiesconcludethatonaverage,theelderly'seconomicstatus
(i.e.,theirincomeandwealth)ishighcomparedtootheragegroups,previouselderly
cohorts,ortothecurrentelderly'sstatusatsomepointinthepast. Generally,studies
consistentlyfindthattheelderlyhavelowerincomesthanthenon-elderlyorthanthe
elderlythemselveshadpriortoretirement,butitisimportanttoputsuchcomparisons
intoperspective. Theelderlyoftenneedtoconsumelessthanthenon-elderlyto
maintaintheirstandardofliving--theelderlyusuallynolongerfacetheexpenses
associatedwithworkingorraisingchildren. Inaddition,theelderlyusuallyhavemuch
higherlevelsofassetsthandothenon-elderly,whichalsoaidstheelderlyin
maintainingtheirlivingstandardsbeyondtheircontributiontomeasuredincome.
Thesebroadcomparisonsoftenmaskimportanteconomicrisksfacedbysome
elderlygroups. Higherfractionsoftheelderlythanthenon-elderlyliveinpoverty,and
elderlypovertyisespeciallyprevalentamongelderlysinglewomen,theelderlyage85
andabove,andblackelderlyAmericans. Inaddition,theelderlyfaceeconomicrisks
thatarenotcommonlyfacedbyothergroups. Forexample,theelderlyfacesubstantial
risksofincurringcatastrophicmedicalexpenses,especiallythoseassociatedwithlong
staysininstitutionalsettings(i.e.,innursinghomes).
ii
B. TheTheoreticalLiterature
Inadditiontotheempiricalliteraturedocumentingtheeconomicstatusofthe
elderly,thereisanextensivetheoreticalliteraturethatattemptstoexplaincurrent
patternsofsaving,consumption,andwealthoftheelderly. Therearethreeprimary
modelsexplainingthecurrentwealthoftheelderly. Lifecyclemodelsassumethe
elderlyholdwealthtoincreasethelevelofconsumptiontheycanmaintain. Thelife
cyclemodelimpliesindividualswanttosmooththeleveloftheirconsumptionthrough
timetomaintainaconstantstandardofliving. Individualssmooththeirconsumption
throughtimebysavingbeforeretirementwhentheirincomesarehighest,andthen
spendingdownthesesavingsduringretirementtohelpmaintaintheirstandardsof
living. Currentempiricaltestsofthelifecyclemodelareatbestmixed. Studiesusing
datafromasingleperiod(crosssectionstudies)tendtocontradictthelifecyclemodel,
whilestudiesfollowingindividualsthroughtime(longitudinalstudies)occasionally
supportthelifecyclemodel.
Theevidenceagainstthelifecyclemodelisnotthatindividualsfailtosaveprior
totheirretirement,butthattheseindividualsmaynotbeusingtheirsavingstomaintain
theirconsumptionaftertheyhaveretired. Theothertwomodelsofelderlysavings
providereasonswhytheelderlymaydecidenottoconsumetheirsavings. First,
precautionarymodelsrecognizethattheelderlyfacerisksthatmayaffecttheircurrent
consumption. Forexample,theelderlymaynotspendtheirsavingsasrapidlyasa
simplelifecyclemodelpredictsbecausetheyareuncertainhowlongtheywillliveor
becausetheymayincursomeunexpectedexpense(suchascatastrophicmedical
expensesorlong-termcareexpenses)inthefuture. Second,bequestmotivemodels
assumethattheelderlymaynotconsumetheirsavingsbecausetheywishtoleave
iii
theirchildrenandotherheirsbequests. Aswiththelifecyclemodel,theempirical
evidencesupportingorrefutingbothprecautionaryandbequestmotivemodelsis
mixed.
ChapterTwo:EstimatesofIncomeandAssetsoftheElderly
ManyoftheestimateswediscussinChapterOneandinourearlier,more
extensivereviewoftheliteratureareout-dated. Inaddition,manyoftheseestimates
usedatafromasinglepointintime,ratherthandatasetsthatfollowthesame
individualsthroughtime. Forthesereasons,weproducedaseriesofnewestimatesof
elderlyincomeandwealthmeasuresusingtworecentdatasetsthatfollowindividuals
throughtime--thePanelStudyofIncomeDynamics(PSID)andtheSurveyof
ConsumerFinances(SCF).
A. Income
Ourresearchindicatesthattheelderlyandnear-elderlyage,theirincomes
decline. From1983to1989,themedianhouseholdincomesofthosepersonswho
wereage55andoverin1983declinedby24percent(thePSID). Theseoverall
declines,however,maskimportantdifferencesfordifferentincomegroups. During
thesesixyears,theincomesofthosewiththelowestinitialincomesin1983(under
$10,000in1994dollarsin1983)tendedtoremainunchangedorincrease,whilemost
(59to65percent)ofthosewiththehighestincomesin1983(over$30,000)
experiencedadeclineintheirincomesof10percentormoreby1989.
Ourcross-sectionalestimatesofincomefordifferentgroupsfortheSCFand
PSIDagreedcloselywiththoseofotherresearchers. Forexample,medianhousehold
incomeforthoseage75andabovein1989(PSID),was$11,500,muchlessthan
medianincomesofthoseage65to74($17,500)orthoseage55to64($29,900). In
iv
addition,elderlymarriedcoupleshadmedianincomesthatwere2.5timesaslargeas
thoseofthe singleelderly,andelderlyblackhouseholdshadmedianincomesthat
wereapproximatelyhalfthatofelderlynonblackhouseholds.
B. WealthandAssets
ThelongitudinalestimatesofwealthandassetsforboththePSIDandSCF
weregenerallyconsistentwiththelifecycletheory. Forexample,asthelifecycle
theorypredicts,theassetsofthenon-elderlyincreasedovertime,whilethoseofthe
elderlydecreasedastheelderlyusedtheirassetstomaintainhigherlevelsof
consumption. Inparticular,themedianassetsofthoseage35to44,45to54,and55
to64in1983(PSID)increasedby15to24percentby1989,whilethemedianasset
levelsdecreasedforthoseage65to74(2.2percent)and75to84(4.7percent)during
thesameperiod.Whilethisismildevidencesupportingthelifecycletheory,therelative
smallchangesinmediantotalnetassetlevelsisalsoconsistentwithothermodelsof
elderlyconsumptionandsaving.
Therewasalsoastrikingcorrelationbetweenincomeandassetsinboththe
SCFandthePSID. Familieswithhigherhouseholdincomeshadmuchgreatermedian
totalnetassetholdings. Forexample,themediantotalnetassetsofelderly
householdswithincomesof$50,000were20to40timesgreaterthanthoseofelderly
householdswithincomesoflessthan$10,000. Finally,elderlyhouseholdshadmuch
highermediantotalnetassetsthannon-elderlyhouseholds(householdswithheads
age35to64),aftercontrollingforhouseholdincome. Thismayalsoreflectlifecycle
savingspatterns--i.e.,elderlyfamilieshavehadtimetosaveandaccumulatetheir
assets.
C. TheAffordabilityofLong-TermCare
ThedetailedincomeandassetdatainboththePSIDandSCFpermitoneto
estimatethefractionofelderlyindividualswhocanaffordtomakelargeexpenditures
outoftheircurrenteconomicresources. Forexample,itispossibletoestimatethe
fractionofelderlywhocanaffordtopurchaselong-termcareinsuranceorpayforaone
yearstayinanursinghome. Inparticular,weestimatedthefractionofelderly
householdswithassetsabovegivenlevels($10,000andhigher)whocanafford a
long-termcareinsurancepolicythatcosts$1,500to$2,500. Byafford,wemeanthe
householdwouldspenduptofivepercentofitsincomeonalong-termcareinsurance
policy. Weestimatedthatlessthan15percentofelderlyhouseholdsin1983and1989
couldaffordsuchpolicies;thesepercentageswouldincreaseifweassumedelderly
householdscoulddevotemorethanfivepercentoftheircurrentincometopurchasea
long-termcarepolicy.
ChapterThree: SimulationResults
Inthischapter,wereporttheresultsofasimulationmodelwespecifiedthat
predictschangesinelderlyassetsusingdatafromthePSID. WeusedPSIDdatafrom
1983to1989insteadofSCFdatabecauseofproblemswithtrackingasufficientlylarge
sampleofindividualsoveralongperiod. Thismodelisaversionofalifecycle
consumptionmodelthatincorporatesaprecautionarymotiveforsaving.
Afterspecifyingourmodel,weidentifiedthemodelparametersthatwerebest
abletopredictchangesinnon-housingassetincomefrom1983to1989. By"best,"we
meanwechosetheparametersthatminimizethemeansquaredifferencebetweenthe
predicted(bythemodel)andactuallevelofnon-housingassetsforallindividualsin
1989. Thismodelaswellasseveralothermodelswetested,however,consistently
vi