How Does Household Income Change in the Ten Years Around Age 65?
16 Pages Posted: 30 Sep 2013
Date Written: September 1, 2013
Abstract
This paper analyzes the post-65 to pre-65 income ratio of two groups of households observed over a period of 10 years, from 2000 to 2010. It shows how these ratios vary across income groups and analyzes the change in income composition to explain the variation in these ratios. The results suggest that people in the bottom half of income distribution did not experience any drop in income after they reached 65. In fact, due to Social Security, the bottom-income quartile actually experienced an increase in average household income after 65. However, the top half of the income distribution experienced a drop in income as they crossed 65. But this did not change the relative position of the households in the income distribution, which is to say that the lowest-income households in 2000 remained in that category in 2010, while households with the highest income in 2000 also remained there a decade later. The average post-65 to pre-65 income ratio dropped steadily with income -- which is to say that higher-income groups had less post-65 income as a percentage of their pre-65 income than did the lower-income groups. The bottom-income quartile experienced an average post-65 to pre-65 income ratio in excess of 150 percent, compared with about 60 percent for the top-income quartile. The primary reason that the bottom-income quartile did not experience any post-age-65 drop in household income was income from Social Security, which replaced most of the lost earnings from labor. However, this was not the case for the top-income quartile: Prior to age 65, that quartile’s income was highly concentrated in labor and capital earnings, and the loss in these categories after 65 was not fully offset by an increase in any other income component. This difference in post-65 to pre-65 income ratios can be explained to a large extent by the progressivity of Social Security benefits and helps underline the significance of the program in providing a secure retirement income foundation -- especially for the low-income groups, though not just for those groups. The policy implication of the study is that since higher-income households experience a significant drop in household income in retirement, they should be prepared to make necessary spending adjustments when they leave the work force.
The PDF for the above title, published in the September 2013 issue of EBRI Notes, also contains the full text of another September 2013 EBRI Notes article abstracted on SSRN: “2013 Health and Voluntary Workplace Benefits Survey: Nearly 90% of Workers Satisfied With Their Own Health Plan, But 55% Give Low Ratings to Health Care System.”
Keywords: Aged, Household income, Income ratio, Income replacement rate, Retirement income adequacy, Social Security
JEL Classification: D12, D31, J14
Suggested Citation: Suggested Citation