Government Spending on the Elderly Also by Dimitri B. Papadimitriou THE DISTRIBUTIONAL EFFECTS OF GOVERNMENT SPENDING AND TAXATION (editor) INDUCED INVESTMENT AND BUSINESS CYCLES (with Hyman P. Minsky) MODERNIZING FINANCIAL SYSTEMS (editor) STABILITY IN THE FINANCIAL SYSTEM (editor) ASPECTS OF DISTRIBUTION OF WEALTH AND INCOME (editor) POVERTY AND PROSPERITY IN THE US IN THE LATE TWENTIETH CENTURY (Co-editor with Edward N. Wolff) PROFITS, DEFICITS AND INSTABILITY (editor) FINANCIAL CONDITIONS AND MACROECONOMIC PERFORMANCE: Essays in Honor of Hyman P. Minsky (Co-editor with Steven M. Fazzari) Government Spending on the Elderly Edited by Dimitri B. Papadimitriou President, The Levy Economics Institute Jerome Levy Professor of Economics, Bard College, Annandale-on-Hudson, New York Selection and editorial matter © Dimitri B.Papadimitriou 2007 Individual chapters © their respective authors 2007 Softcover reprint of the hardcover 1st edition 2007 978-0-230-50061-7 All rights reserved.No reproduction,copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced,copied or transmitted save with written permission or in accordance with the provisions of the Copyright,Designs and Patents Act 1988,or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency,90 Tottenham Court Road,London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published in 2007 by PALGRAVE MACMILLAN Houndmills,Basingstoke,Hampshire RG21 6XS and 175 Fifth Avenue,New York,N.Y.10010 Companies and representatives throughout the world. PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St.Martin’s Press,LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States,United Kingdom and other countries.Palgrave is a registered trademark in the European Union and other countries. ISBN 978-1-349-35281-4 ISBN 978-0-230-59144-8 (eBook) DOI 10.1057/9780230591448 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources.Logging,pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Government spending on the elderly / edited by Dimitri B. Papadimitriou. p.cm. Includes bibliographical references and index. 1.Older people–Government policy–United States.2.Social security–United States.3.Old age assistance–United States. 4.Older people–United States–Social conditions.5.Age distribution (Demography)–Economic aspects–United States.I.Papadimitriou, Dimitri B. HQ1064.U5G566 2007 362.6––dc22 2007022500 10 9 8 7 6 5 4 3 2 1 16 15 14 13 12 11 10 09 08 07 Contents List of Tables viii List of Figures xii List of Abbreviations and Acronyms xvi The Levy Economics Institute of Bard College xviii Acknowledgements xix Notes on Contributors xx 1 Economic Perspectives on Aging: An Overview 1 Dimitri B. Papadimitriou Part I Welfare State and the Incentives to Retire 2 European Welfare State Regimes and Their Generosity toward the Elderly 23 Axel Boersch-Supan Comments to Chapter 2 48 Sergio Nisticò 3 Global Demographic Trends and Provisioning for the Future 53 L. Randall Wray Comments to Chapter 3 73 Richard Startz Part II Aspects of Economic Well-being and Gender Disparities among the Elderly 4 Net Government Expenditures and the Economic Well-being of the Elderly in the United States, 1989–2001 81 Edward N. Wolff, Ajit Zacharias, and Hyunsub Kum Comments to Chapter 4 118 Robert Haveman 5 Differing Prospects for Women and Men: Young Old-Age, Old Old-Age, and Eldercare 123 Lois B. Shaw Comments to Chapter 5 137 Rania Antonopoulos v vi Contents Part III Changing Patterns of Retirement Behavior 6 Working for a Good Retirement 141 Barbara A. Butrica, Karen E. Smith, and C. Eugene Steuerle Comments to Chapter 6 175 Lucie G. Schmidt 7 Net Intergenerational Transfers from an Increase in Social Security Benefits 178 Li Gan, Guan Gong, and Michael Hurd Comments to Chapter 7 189 Daniel L. Thornton Part IV Interaction between Private and Public Provisioning 8 The Changing Role of Employer Pensions: Tax Expenditures, Costs, and Implications for Middle-class Elderly 193 Teresa Ghilarducci Comments to Chapter 8 218 Zvi Bodie 9 Retiree Health Benefit Coverage and Retirement 220 James Marton and Stephen A. Woodbury Comments to Chapter 9 243 Barbara Wolfe Part V Budgetary and Macroeconomic Implications of Aging 10 Population Forecasts, Fiscal Policy, and Risk 249 Shripad Tuljapurkar Comments to Chapter 10 266 Clark Burdick 11 Wage Growth and the Measurement of Social Security’s Financial Condition 272 Andrew G. Biggs and Jagadeesh Gokhale Comments to Chapter 11 306 Stephanie A. Kelton Contents vii Part VI Retirement Security: Problems and Prospects 12 The Adequacy of Retirement Resources among the Soon-to-Retire, 1983–2001 315 Edward N. Wolff Comments to Chapter 12 343 Brooke Harrington 13 Minimum Benefits in Social Security 347 Melissa M. Favreault, Gordon B. T. Mermin, and C. Eugene Steuerle Comments to Chapter 13 389 Robert K. Triest Author Index 393 Subject Index 398 List of Tables 2.1 Income inequality, leisure time, and life expectancy at birth 25 2.2 Time-series regressions of social expenditure share devoted to the elderly on social expenditure share devoted to the young (percentage of GDP) 32 2.3 Distribution of income, consumption, and wealth among the elderly (GINI coefficients) 34 2.4 Life expectancy at birth, 2003 37 2.5 Pooled time-series cross-section regressions of social expenditures for the elderly as percent of GDP 39 2.6 Preferences about size and redistribution of welfare state 41 2.7 Incentive effects and retirement behavior 44 4.1 A comparison of the LIMEW and Extended Income (EI) 83 4.2 Household money income (2005 dollars) 86 4.3 Household base income (2005 dollars) 89 4.4 Income from home wealth (2005 dollars) 90 4.5 Income from nonhome wealth (2005 dollars) 92 4.6 Government cash transfers (2005 dollars) 93 4.7 Government noncash transfers (2005 dollars) 93 4.8 Public consumption (2005 dollars) 94 4.9 Taxes (2005 dollars) 96 4.10 Net government expenditures (2005 dollars) 97 4.11 Government expenditures and taxes: nonelderly and elderly households (mean values, 2005 dollars) 99 4.12 Household production (2005 dollars) 100 4.13 LIMEW (2005 dollars) 102 4.14 Composition of LIMEW and Extended Income: nonelderly and the elderly 104 4.15 Inequality among the elderly and nonelderly by measure of well-being (Gini ratios) 110 5.1 Percent married, probability of surviving to next age, and percent female by age 124 5.2 Disabilities and nursing home residence by age and gender 128 6.1 Summary of policy simulations 146 6.2 Mean baseline respondent wealth and change from additional work (2006 $) 149 6.3 Mean respondent wealth and annuity income in 2049 under current law and estimated change under alternate reform scenarios (2006 $) 151 viii List of Tables ix 6.4 Total Social Security income, cost, Social Security deficit in 2045 by reform scenario (dollars in billions) 155 6.5 Total change in income tax, Social Security deficit, and unified deficit in 2045 by reform scenario (dollars in billions) 158 6.A.1 Summary of core processes modeled in DYNASIM 162 6.A.2 Mean respondent wealth and annuity income in 2049 under current law and estimated change under alternate reform scenarios (2006 $) 167 6.A.3 Aggregate impact of working one and five years longer on Social Security and general revenues (population in millions and amounts in billions) 169 7.1 Interest rate and utility function parameters 182 7.2 Bequeathable wealth, Social Security benefits, expected present value of consumption and bequests (thousands) 65-year-old male 185 7.3 Bequeathable wealth, Social Security benefits, expected present value of consumption and bequests (thousands) 65-year-old female 186 7.4 Bequeathable wealth, Social Security benefits, expected present value of consumption and bequests (thousands) 65-year-old male 186 7.5 Bequeathable wealth, Social Security benefits, expected present value of consumption and bequests (thousands) 65-year-old female 186 8.1 Selected tax expenditures for the US budget 195 8.2 Pension participation and growth rates of all private sector workers by selected category and ranked by participation rates in 2005 197 8.3 DB pension spending has increased faster than cash compensation and medical insurance for all workers (production and salary expressed in dollars per hour) 199 8.4 Changes in job tenure for industries with the largest job growth 203 8.5 Pension benefit simulations: of a 401(k) and typical DB plan under ideal and probable conditions 205 8.A.1 Selected characteristics of job as reported by people working age 55–60 in2002 211 9.1 Summary statistics of samples used in estimation (sample proportions except where noted) 232 9.2 Probit estimates of retirement probability between 1992–1994, 1994–1996, and 1992–1996, full-time older male workers in the HRS (probit betas, with P-values and marginal effects) 235 11.1 Actuarial balance and change in response to change in real wage growth and discount rates 286