Income Composition, Income Trends, Income Shortfalls of Older Households

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A monthly research report from the EBRI Education and Research Fund 2013 Employee Benefit Research Institute

February 2013 No. 383

Incom e Com posi t ion , Incom e Trends, and Incom e Shor t fa l l sof Older Households

By Sudipto Banerjee, Ph.D., Employee Benefit Research Institute

A T A G L A N C E

For all age groups above 65, Social Security remains the primary source of income. In 2009, households

ages 6574 and households with members age 85 or above received 54 percent and 66 percent of their

total household incomes, respectively, from Social Security benefits.

The importance of Social Security income increases with age. For households that had members ages 65

69 in 2001, the share of household income derived from Social Security rose from 47 percent in 2001 to

almost 60 percent in 2009.

Income from pensions and annuities is the second-largest source of income for older households. In 2009,

households ages 6574 received 17.1 percent and households above age 85 received 15.3 percent of their

incomes from pensions and annuities.

In 2009, two-fifths of households with members age 65 and above had incomes less than their

expendituresmeaning they had deficits.

In 2009, 14.3 percent of households with members age 65 and above had spending that exceeded 175 per-cent of their household incomes.

Households that face income shortfalls not only have much lower levels of assets, they spend down their

liquid assets at a faster rate than households with no income shortfalls.

The probability of running into an income shortfall is much higher for those with lower incomes. In 2009,

66.4 percent of households age 65 or older in the bottom-income quartile faced income deficits, while only

6.8 percent in the top-income quartile faced such shortfalls.

Median home- and health-related expenses, as well as median total expenses, are much higher for

households that face income shortfalls, even if they have lower levels of income.

Singles, households with no pensions, African-Americans, and Hispanics have larger shares of households

with income deficits.


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February 2013 No. 383 2

Sudipto Banerjee is a research associate at the Employee Benefit Research Institute (EBRI). This Issue Briefwas

writtenwith assistance from the Institutes research and editorial staffs. Any views expressed in this report are those of

the author and should not be ascribed to the officers, trustees, or other sponsors of EBRI, EBRI-ERF, or their staffs.

Neither EBRI nor EBRI-ERF lobbies or takes positions on specific policy proposals. EBRI invites comment on this

research.

Copyright Information: This report is copyrighted by the Employee Benefit Research Institute (EBRI). It may beused without permission but citation of the source is required.

Recommended Citation:Sudipto Banerjee, Income Composition, Income Trends and Income Shortfalls of Older

Households,EBRI Issue Brief, no. 383 (Employee Benefit Research Institute, February 2013).

Report availability:This report is available on the Internet at www.ebri.org

Table of Contents

Introduction .......................................................................................................................................................... 4Data ..................................................................................................................................................................... 4Income Composition .............................................................................................................................................. 5Income Comparison With CPS ................................................................................................................................ 7Change in Household Income ................................................................................................................................. 7Income Shortfalls .................................................................................................................................................. 9Change in Wealth ................................................................................................................................................ 11Income Shortfalls across Income Quartiles ............................................................................................................ 12Expenditure Patterns of Households with and without Deficits ................................................................................. 12Does a Pension Make Any Difference? ................................................................................................................... 14Demographic Differences ..................................................................................................................................... 14Conclusion .......................................................................................................................................................... 14

References .......................................................................................................................................................... 17Endnotes ............................................................................................................................................................ 17Figures

Figure 1, Median Income, in 2010 $s, from Different Sources, and Average Percentage Share of Each Source in Total

Income, by Age Group .......................................................................................................................................... 6

Figure 2, Comparison of Percentage of Different Income Sources in Total Household Income of 65+ Households

between the Health and Retirement Study (HRS) and Current Population Survey (CPS) .................................... 8

Figure 3, Longitudinal Change in Total Household Income (Median), in 2010 $s, for Different Age Cohorts .................... 8

Figure 4, Longitudinal Change in Share of Income from Different Sources, for Those Ages 60-64 in 2001 ...................... 8

Figure 5, Longitudinal Change in Share of Income from Different Sources, for Those Ages 65-69 in 2001 .................... 10

Figure 6, Longitudinal Change in Share of Income from Different Sources, for Those Ages 70-74 in 2001 .................... 10

Figure 7, Percentage of Households With Household Incomes Less Than Household Expenditures,

by Age Groups IIII ............................................................................................................................................. 13


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Figure 8, Percentage of Age 65+ Households With Different Degrees of Income Deficit ................................................. 13

Figure 9, Longitudinal Change in Median Total Household Wealth and Non-Housing Wealth (in 2010 $s) for those 65+

in 2001 ................................................................................................................................................................. 13

Figure 10, Percentage of 65+ Households With Household Incomes Less Than Household Expenditures, By Income

Quartile ................................................................................................................................................................ 13

Figure 11, Median Expenditure (in 2010 $s) in Each Spending Category for 65+ Households, by Income Deficit .......... 16

Figure 12, Percentage of 65+ Households With Household Incomes Less Than Household Expenditures, by Pension

Status .................................................................................................................................................................. 16

Figure 13, Percentage of 65+ Households With Household Incomes Less Than Household Expenditures, by

Single/Couple Status ........................................................................................................................................... 16

Figure 14, Percentage of Age 65+ Households With Household Incomes Less Than Household Expenditures,

By Race ............................................................................................................................................................... 16


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Inc om e Com posi t ion, Inc om e Trends, and Incom e Shor t fa l lsof Older Househol ds

By Sudipto Banerjee, Ph.D., Employee Benefit Research Institute

Introduction

A steady, reliable source of retirement income is essential to financial security in retirement. Policymakers, employers,and financial-service providers have long tried to design policies and products that can help retirees acquire steady

retirement income, but such policies and products must also respond to the constantly changing financial environment.

Furthermore, in order to adapt these policies and products for future retirees, it is important to understand the current

state of income in retirement.

This Issue Briefexamines the income patterns of older U.S. households. Using data from the Health and Retirement

Study (HRS) and Consumption and Activities Mail Survey (CAMS), this study combines both income and expenditure

data to gain a more complete picture of the retirement income adequacy of current retirees. It focuses on three

different aspects of retirement income:

The sizes of the different components of income and their shares of total household income.

How the importance of each component of retirement income changes with age for different cohorts.

Finally, it estimates the percentage of older households with retirement incomes that are not sufficient to finance

their spending needs.

The study also identifies the expenditure components that drive households to income deficits and identifies the key

demographic characteristics of these households.

Data

As noted above, two different sources of data are used for this study. First is the Health and Retirement Study (HRS), a

study of a nationally representative sample of U.S. households with individuals over age 50. It is the mostcomprehensive survey of older Americans in the nation, covering in detail topics such as health, assets, income, and

labor-force status. It is a biennial, longitudinal survey with survey waves in even-numbered years beginning in 1992.

The initial sample consisted of individuals born between 1931 and 1941 and their spouses, regardless of their birth

years. Newer cohorts have been added in the following survey years. The study is sponsored by the National Institute

on Aging (NIA) and the Social Security Administration (SSA) and administered by the Institute for Social Research (ISR)

at the University of Michigan.1

The other data used in this study come from the Consumption and Activities Mail Survey (CAMS), which was started in

2001 as a supplement to the HRS. From the 2000 HRS, 5,000 households were selected at random and mailed the

CAMS questionnaire. In couple households, the questionnaire was sent randomly to one of the two spouses. Since

2001, CAMS has been conducted every two years, with 2009 the latest round of available data. For those between ages

5564, the aggregate expenditures in each of the 32 categories (six durable and 26 nondurable items) of CAMS are

very close to the same categories in the Consumer Expenditure Survey (CEX) , the benchmark survey on household

consumption in the United States. However, CAMS reports higher consumption expenditures for older households (Hurd

and Rohwedder, 2011).

The household income and wealth measures are taken from the RAND version of HRS data because it provides

consistent measures of income and wealth across all waves.


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Income Composition

Figure 1 shows the income composition of older households between the years 2001 and 2009, by age group. It is

important to note the different components of income as shown below.

Laborincome: sum of wage and salary income; bonuses, overtime pay, commissions, tips; second job;

professional-practice or trade income.

Capitalincome: sum of business or farm income, self-employment earnings, business income, gross rent,dividend and interest income, trust fund or royalties, and other-asset income.

Pension/Annuityincome: sum of all pension and annuity payments. This includes income from defined

benefit pensions, annuities, as well as income from other retirement savings such as 401(k)-type plans and

individual retirement accounts (IRAs).

Social Securityincome: includes Social Security retirement, spouse, and widow or widower benefits.

Otherincome: sum of Social Security disability benefits, unemployment and workers compensation, veterans

benefits, food stamps, alimony, lump-sums from insurance, pensions or inheritance.

All income figures are annual and reported at the household level, so the respondents and spouses incomes are added

for a couple household. The figure reports both mean and median (mid-point) dollar amounts (in 2010 dollars) for each

income component, as well as total household income. It also reports the mean percentage share of each income

component in total household income. All numbers are reported for three different age groups: ages 6574 (Age Group

I), 7584 (Age Group II), and ages 85 and above (Age Group III).

Note that for all three age groups, Social Security remains the most important source of income, and its importance

increases with age. For example, in 2001, households in Age Group I derived half of their income from Social Security

while households in Age Group III derived almost 70 percent of their income from Social Security. These shares did not

change much over the 9-year period studied. In 2009, the shares for Social Security income for Age Groups I and III

were 54 percent and 66 percent, respectively. Also, due to the progressivity of the Social Security benefit formula,

mean and median benefits from Social Security are very close.

Note also that income from pensions and annuities is the second-most important source of income for most older

households. The share of pension and annuity income increases from Age Group I to Age Group II, but then falls for

Age Group III. For example, in 2009, the shares of pension and annuity income were 17.1 percent for Age Group I,

18.4 percent for Age Group II and 15.3 percent for Age Group III. There also exist large differences between mean and

median incomes from pensions and annuities. In 2009, the mean of pension and annuity income were $11,612, $9,682

and $4,917 for Age Groups I, II, and III, respectively, while median pension and annuity incomes for all three age

groups were zero, because only a share of the older population receives such income.

Labor and capital are the other two important sources of income for older households. Labor income is a significant

part of income for Age Group I, but, as expected, the share of labor income falls rapidly with age. In 2001, households

in Age Group I derived 11.4 percent of their income from labor earnings, but for Age Groups II and III the shares were

2.6 percent and 0, respectively. These proportions did not change much across the years studied. On the other hand,capital income remains a steady source of income for all age groups; in 2001, capital incomes share remained almost

unchanged at about 13 percent for all age groups, while in 2009, the share represented by capital income actually

increased, from 9.9 percent for Age Group I to 13.8 percent for Age Group III. Income from other sources remains

small and declines with age.

Total household income expectedly falls with age, and there remain large differences between mean and median

household incomes. The presence of a few large earners drives this difference between mean and median household

incomes, but mean and median incomes of older households did not change much throughout the past decade. For Age

Group I, the 2001 average and median household incomes were $50,975 and $34,192, respectively. For the same


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Mean

Median

%

ofTo

tal

Incom

e

Mean

Median

%

ofTo

tal

Incom

e

Mean

Median

%

ofTo

tal

Incom

e

Labor

$9,135

$0

11.4%

$1,456

$0

2.6%

$18

$0

0.0%

Capital

11,991

492

13.3

7,790

615

13.1

5,431

147

13.0

Pension/Annu

ity

10,358

649

18.6

8,871

1,418

19.2

4,454

0

12.9

SocialSecurity

16,000

15,111

50.2

15,017

14,225

60.0

12,832

12,763

69.1

Others

3,489

0

6.2

1,879

0

4.9

1,402

0

4.7

TotalIncome

50,975

34,192

35,015

25,112

24,199

16,761

Labor

12,719

0

14.7

1,598

0

3.2

188

0

0.3

Capital

12,951

245

11.3

7,179

445

12.4

5,009

42

9.7

Pension/Annu

ity

13,253

910

18.4

11,068

2,275

20.4

5,460

0

15.5

SocialSecurity

16,452

15,499

47.6

15,896

14,788

59.0

13,166

12,442

69.5

Others

4,330

0

7.7

2,231

0

4.8

1,458

0

4.8

TotalIncome

59,708

37,024

37,974

26,434

25,284

17,078

Labor

10,802

0

13.5

2,037

0

3.1

173

0

0.3

Capital

12,975

401

12.6

9,510

497

13.8

4,744

66

11.6

Pension/Annu

ity

11,926

1,205

18.9

11,897

3,562

21.7

5,856

167

17.1

SocialSecurity

17,274

16,780

47.4

17,228

16,712

56.9

13,793

13,331

66.2

Others

9,385

0

7.4

2,160

0

4.3

1,706

0

4.6

TotalIncome

62,364

39,537

42,835

30,846

26,273

19,913

Labor

13,120

0

14.1

2,341

0

3.8

243

0

0.5

Capital

14,065

354

13.0

11,463

622

14.0

17,499

105

14.4

Pension/Annu

ity

11,347

0

18.1

10,485

1,336

19.4

6938

0

16.7

SocialSecurity

17,407

17,164

47.7

16,931

16,702

57.6

13,854

13,185

62.6

Others

5,327

0

6.8

2,544

0

5.0

2,615

0

5.5

TotalIncome

61,269

41,001

43,766

30,647

41,152

20,122

Labor

9,677

0

11.9

2,139

0

3.5

358

0

0.5

Capital

8,591

73

9.9

8,482

100

11.6

6,245

7

13.8

Pension/Annu

ity

11,612

0

17.1

9,682

0

18.4

4,917

0

15.3

SocialSecurity

18,441

17,666

53.9

17,236

17,068

60.6

12,780

12,222

65.7

Others

4,647

0

7.0

5,645

0

5.7

1,439

0

4.5

TotalIncome

52,970

37,201

43,187

29,626

25,741

19,623

Source:Employ

eeBenefitResearchInstituteestimatesfromHea

lthandRetirementStudy(HRS).

Me

dian

Income,

in2

010$s,

from

Differen

tSources,

an

dAverage

Percen

tage

Shareof

Eac

hSource

inTo

talIncome,b

yAge

Groups

Figure1

2001

2003

2005

2007

2009

Ages6574

Ages7584

Age85+

ebri.org Issue Brief February 2013 No. 383 6


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age group in 2009, mean and median household incomes were $52,970 and $37,201, respectively, while for Age Group

III mean household income increased from $24,199 in 2001 to $25,741 in 2009, and median household income

increased from $16,761 to $19,623 during the same period.

Income Comparison With CPS

Gustman, Steinmeier and Tabatabai (2012) compared pension-income data from the Current Population Survey (CPS)

with pension-income data from the HRS and found that pension income data from the CPS understates its share ofincome among households ages 6569. The CPS is one of the data sources often used for research on topics related to

retirement income, so it is important to point out if there are other systemic differences in retirement income

components between the CPS and other data sources.

Figure 2 compares the shares of different components of household income between the CPS and the HRS for

households age 65 and older. The CPS numbers are taken from the EBRI Databook on Employee Benefits(Table 7.5,

http://ebri.org/pdf/publications/books/databook/DB.Chapter%2007.pdf). First, note that the share represented by

Social Security income is much higher in the HRS than in the CPS. It should be noted that the CPS measure includes

Social Security Disability Insurance (SSDI) payments, while the HRS measure does not. Still, the differences are very

large. Secondly, the share represented by labor earnings is much higher in the CPS than in the HRS, though survey

design differences can drive some of these differences. Thirdly, the differences between the two data sets are not large

in pension and annuity income or in asset income, but in most years the share of income for both those categories in

the CPS is slightly higher. Finally, income from other sources is higher in the HRS than in the CPS, although this could

be due to the difference in components used to measure this income category.

Change in Household Income

How income sources change in retirement is a topic of interest not only to retirees, but to financial service providers

and policy makers as well. Figure 3 shows how median household income changed for different age cohorts during the

period of the study, 2001 to 2009. Three age cohorts were considered: households with at least one member ages 60

64 in 2001 (Cohort I), ages 6569 in 2001 (Cohort II), and ages 7074 in 2001 (Cohort III).

One of the advantages of using HRS data is that it tracks the same households over time. Fig. 3 exploits this panelaspect of the HRS to show the change in household income of the same set of households. First, looking only at

calendar year 2001, the cross-sectional difference in income for households of different ages can be noted. Cohort I

had a median household income of $47,100, while Cohort II had $39,419, and Cohort III had $36,043. Now, observing

the change in the panel over time, this cross-sectional finding can be noted as well. For example, for Cohort I, median

household income dropped from $47,100 in 2001 to $37,653 in 2009, close to the cross-sectional difference in 2001.

For Cohort II, median household income dropped from $39,419 in 2001 to $32,284 in 2009, and for Cohort III it

dropped from $36,043 to $30,199 during the same period. The steady drop in income of retired households coincides

with a drop in their household expenditures (Banerjee, 2012). This might indicate that retired households adjust their

expenditures to their declining income.

The next three figures show how the composition of income changed for these cohorts during the period of 2001

2009. Figure 4 shows the changes in income composition for Cohort I, where it can be noted that, in 2001, the largest

share (40 percent) of income for this cohort came from labor earnings. Over the period of the study, this share declined

steadily, slipping to 12.2 percent in 2009. The second-largest source of income (20.3 percent) for this cohort in 2001

was Social Security, with a share of income that increased steadily, becoming the largest source of income between

2003 and 2009, when it reached 56.2 percent. The third-largest component of income (14.7 percent) in 2001 for this

cohort was capital income, but its share fell to 10.1 percent in 2009. On the other hand, the share of pension/annuity

income increased slowly from 12.7 percent in 2001 to 15 percent in 2009, when it was the second-largest source of

income. Finally, the share of income represented by other sources almost halved during the period of the study, falling

from 12.2 percent in 2001 to 6.4 percent in 2009.


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CPS HRS* CPS HRS CPS HRS CPS HRS CPS HRS

2001 42.0% 55.6% 19.5% 18.2% 17.0% 13.2% 19.4% 7.2% 2.1% 5.6%

2003 41.9 53.7 20.6 18.7 13.9 11.5 21.7 9.4 1.9 6.5

2005 40.1 52.2 19.3 19.6 13.6 12.9 24.8 9.1 2.2 6.1

2007 38.6 52.5 18.6 18.4 15.6 13.5 25.3 9.2 1.8 6.1

2009 41.5 57.6 19.2 17.4 11.3 10.9 25.7 7.7 2.3 6.2

Source: Employee Benefit Research Institute estimates from Health and Retirement Study (HRS).

* HRS shares include only OASI (Social Security) benefits.

2001 2003 2005 2007 2009

Cohort I $47,100 $45,171 $43,298 $42,036 $37,653

Cohort II 39,419 38,737 36,578 35,313 32,284Cohort III 36,043 34,475 33,283 31,382 30,199

Cohort I : Ages 6064 in 2001.

Cohort II : Ages 6569 in 2001.

Cohort III : Ages 7074 in 2001.

Figure 3

Longitudinal Change in Total Household Income

(Median), in 2010 $s, for Different Age Cohorts

Source: Employee Benefit Research Institute estimates from Health and Retirement

Study (HRS).

Comparison of Percentage Share of Different Income Sources

in Total Household Income of 65+ Households between the

Health and Retirement Study (HRS) and Current Population Survey (CPS)

Figure 2

OASDI (Social Security) Pension & Annuities Asset Income Labor Earnings Other

0%

10%

20%

30%

40%

50%

60%

2001 2003 2005 2007 2009

Figure 4Longitudinal Change in Share of Income from Different Sources,

for Those Ages 6064 (Cohort I) in 2001

Labor Capital

Pension/Annuity Social Security

Other




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Figure 5 shows similar changes in income shares for Cohort II between 2001 and 2009. The main difference between

this cohort and Cohort I is that the relative importance of the top two components of income remained unchanged for

Cohort II. Throughout the period, Social Security remained the primary source of income for this cohort, rising from

47 percent of household income in 2001 to almost 60 percent in 2009. Income from pensions and annuities remained a

distant, second-most-important source of income, with its share remaining almost unchanged throughout the period. As

expected, the share represented by labor income fell steadily, from 15.8 percent in 2001 to 5.7 percent in 2009. In fact,

in 2009, labor income was the smallest share of household income for Cohort II. Capital income and income from other

sources remained more or less stable, the formers share dropping from 12.3 percent in 2001 to 10.5 percent in 2009,

while other incomes share changed slightly from 7.3 percent to 6.5 percent during the same period.

Similarly, Figure 6 shows the changes for Cohort III. The patterns are similar to Cohort II: Social Security remained the

primary source of income throughout the period, but its share was higher than it was for Cohort II. In 2001, the

households in Cohort III derived 53.8 percent of their income from Social Security, which increased to 63.5 percent in

2009. Pensions and annuities, the second-largest source of income, provided 20.8 percent of Cohort IIIs income in

2001, which remained almost unchanged until 2007 before dropping to 17.7 percent in 2009. Capital income remained

the third-largest source of income for this cohort throughout the period, but its share declined from 13.4 percent in

2001 to 10.4 percent in 2009. The share represented by labor income dropped from 7 percent in 2001 to 3.2 percent in

2009 (when it was the smallest source of income).

Income Shortfalls

In retirement preparation studies much attention is given to income adequacy in retirement. Sophisticated models have

been built to project future income and expenditures to determine appropriate levels of income adequacy. By

examining the existing data on both income and expenditure for current retirees, it is possible to get a picture of

income adequacy. As mentioned above, the HRS and its supplement, CAMS, can be used together for this purpose.

Figure 7 shows the percentage of households with household incomes less than household expenditures. An important

point to note is that the income used here, and throughout the study, is gross income, while expenditures are financed

by net income. As a result, some households that have grossincomes higher than their expenditures, but with net

incomes lower than their expenditures, may be wrongly classified as having incomes that exceed their expenditures. It

is very difficult to estimate the tax bracket of each household with the survey information, and the analysis does notattempt to do so. Rather, it is recommended that the percentage of households with incomes less than expenditures

shown in this study be treated as the lower bound, which means the actual percentage of such households could be

higher. Also, it should be noted that merely having incomes less than expenditures does not necessarily mean that

these households cannot afford their expenditures or that they have run out of money. Most households have positive

asset holdings, which can be tapped to bridge the gap between income and expenditures. But this chart still provides a

good sense of the percentage of households that do not have regular sources of income sufficient to finance their

spending. Finally, the following analysis in Figure 7 is based on the yearly cross-sectional data and does not refer to

changes in a panel.

Figure 7 shows the percentage of inadequate-income households by age group and calendar year. As in Figure 1, three

separate age groups are considered: households with at least one member age 6574 (Age Group I), 7584 (Age

Group II) and 85 and above (Age Group III).The final column provides the numbers for all households age 65 and

older. Some important observations can be noted.

First, in all different age groups, the percentage of inadequate-income-households decreased during the period studied.

In 2001, 53 percent of households in Age Group I did not have adequate income to finance their expenditures, but by

2009 that fell to 37.2 percent. For Age Group II, the drop in income-inadequate households was from 57.5 percent in

2001 to 43.9 percent in 2009. For the oldest group (Age Group III), the percentage of income-inadequate households

dropped from 64.6 percent in 2001 to 46.3 percent in 2009. Overall, the percentage of households age 65 and older

with inadequate income fell from 55.5 percent in 2001 to 40.5 percent in 2009. While the drop in income-


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0%

10%

20%

30%

40%

50%

60%

70%

2001 2003 2005 2007 2009

Figure 5Longitudinal Change in Share of Income from

Different Sources, for Those Ages 6569 (Cohort II) in 2001

Labor Capital


Other


0%

10%

20%

30%

40%

50%

60%

70%

2001 2003 2005 2007 2009

Figure 6Longitudinal Change in Share of Income from

Different Sources, for Those Ages 7074 (Cohort III) in 2001

Labor Capital


Other




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inadequate households is good news, serious concerns remain since more than two-fifths of households age 65 or older

outspent their income.

It is important to know what percentage of households lack adequate income to finance their expenditures, but a single

number may not be very informative, because some households might have incomes that fall just short of their

expenditures while others might have far deeper shortfalls. It is important to know how many households have income

shortfalls that are acute, as they are the ones that might have to draw down their accumulated savings faster than

anticipated.

Figure 8 shows the percentage of households age 65 or older with different degrees of income shortfalls between the

years 2001 and 2009. The income shortfall, or deficit, is calculated as the difference between income and expenditure,

measured as a percentage of income. For this analysis, households are divided into six different deficit categories:

Households with no deficit (Category I); households with deficits of less than 10 percent (Category II); households

with deficits between 10 percent and 25 percent (Category III), households with deficits between 25 percent and

50 percent (Category IV), households with deficits between 50 percent and 75 percent (Category V), and households

with deficits of more than 75 percent (Category VI).

Note that among the categories with deficits (Categories II through VI), the highest percentage of households belong

to Category VImeaning the highest level of deficit. While this is alarming, the percentage of households belonging to

this category has dropped steadily over time: in 2001, 22.7 percent of households age 65 or older had income deficitsof 75 percent or greater, which fell to 14.3 percent in 2009 (phrased another way, they spent 175 percent or more of

their income in 2009). As with the drop in the overall percentage of inadequate-income households, the percentage of

households in every deficit category (except Category III) dropped between 2001 and 2009. The percentage of

households in Category III increased slightly, from 7.1 percent in 2001 to 7.5 percent in 2009, while in Category II the

drop between 2001 and 2009 was very small: 6.4 percent to 5.5 percent. In other categories, the drops were larger

for example, in Category IV the percentage of households with income deficits fell from 10.8 per-cent in 2001 to

7.8 percent in 2009.

Change in Wealth

As noted earlier, an income shortfall does not necessarily mean that a household cannot sustain its expenditures. Itmight have enough savings to cover the income shortfall, for instance. Consequently, it is also important to check the

level of savings that these households have, and the rate at which they are drawing down their savings. Figure 9 tracks

the change in total household wealth and non-housing wealth of a group of households that had at least one member

age 65 or older in 2001. Comparing their 2001 incomes and expenditures, these households are divided into two

groups: households with deficits and those with no deficits. Notice that the levels of wealth (both total wealth and

nonhousing wealth) are much lower for households with 2001 deficits than in households with no 2001 deficits. For

example, in 2002, households with no 2001 deficits had a median total wealth of $304,939, compared with $152,061

for households with 2001 income deficits. The difference (in percentage terms) was even higher for nonhousing wealth.

This suggests that households with larger accumulated savings can keep expenditures within their incomes, while

households with smaller savings cannot. Of course, this renders the latter group more vulnerable to running out of

money in retirement.

A better picture of this can be formed by looking at the rates at which both types of households liquidate, or

decumulate, their wealth. Households with no deficits in 2001 experienced a 15 percent decline in their median total

wealth between 2002 and 2010, from $304,939 to $260,000. On the other hand, households with deficits in 2001 had a

slightly lower (10.4 percent) decline in their median wealth, from $152,061 to $136,200, during the same period. It is

important to note that total wealth includes housing wealth, and that part of the change in total wealth could be due to

the change in the value of houses, rather than active spending down by the households.

A better understanding of spending down can be obtained by examining the change in non-housing assets. Between

2002 and 2010, non-housing assets for households with no 2001 deficits dropped 21 percent, compared with a drop of


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31 percent for households with 2001 deficits. So households with deficits not only have much lower levels of liquid

assets but they also draw down their assets at a faster rate than households without deficits.

The rest of this article identifies how households with and without deficits are divided across demographic lines and the

factors contributing to income shortfalls.

Income Shortfalls across Income Quartiles

To identify which households are more likely to run into deficits, it is important to understand their income and

expenditure patterns. A key question: How are the households with income shortfalls spread across the income

spectrum? Are they concentrated on the lower end of the income scale or are they spread evenly across it? Figure 10

sheds some light on this, showing the percentage of households age 65 or older in each income quartile with household

incomes less than household expenditures.

Not surprisingly, the share of households with income deficits is highest in the lowest-income quartile. However, the

second- and third-income quartiles also contain significant shares of such households. In 2001, 86.5 percent of

households in the bottom quartile had income shortfalls, while almost 20 percent of households in the top-income

quartile had expenditures that exceeded their incomes. However, during the period of 2001 to 2009, the share of

households with income deficits decreased in every income quartile. The top quartile had only 6.8 percent of

households with income deficits in 2009, but the bottom three quartiles still had large shares of households with incomedeficits: 66.4 percent in the bottom quartile, 50.9 percent in the second quartile, and 29.2 percent in the third income

quartile.

Expenditure Patterns of Households with and without Deficits

To identify what factors contribute to those income deficits, it is important to know both the income and expenditure

patterns of households. Figure 10 shows that these households are more likely to have lower incomes. But why cant

these households restrict their spending to avoid income deficits? This cannot be answered without knowing on what

items they are spending their money.

Figure 11 shows the expenditure patterns of households age 65 or older with or without income deficits. Median

expenditures in the following categories, as well as median total expenditures, are shown for both types of households:

Home-related expensesinclude mortgage; property taxes; homeowners or renters insurance; rent; utilities;

home repairs; home furnishings; housecleaning supplies; housekeeping and laundry services; gardening and

yard supplies; and gardening and yard services.

Food expensesinclude food and drink, including alcoholic beverages that are bought in grocery and other

stores. Dining out is not included here.

Health expensesinclude out-of-pocket (uninsured) health insurance costs, including Medicare supplemental

insurance; out-of-pocket costs on prescription and nonprescription drugs; out-of-pocket costs of hospital care,

doctor services, lab tests, eye, dental, and nursing home care; and out-of-pocket costs for medical supplies.

Transportation expensesinclude car payments (principal and interest), vehicle insurance, vehicle

maintenance, and gas.

Clothing expensesinclude clothing and apparel (including jewelry) as well as personal-care products and

services.

Entertainment expensesinclude trips and vacations; tickets to movies, sporting, or performing-arts events;

hobbies and leisure equipment (photography, reading, camping, etc.); dining out in restaurants, cafes, and

diners; and take-out food.

Other expensesinclude contributions to religious, educational, charitable, or political organizations, and cash

and gifts to family and friends outside the household (including alimony and child-support payments).


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Age Group I

(6574)

Age Group II

(7584)

Age Group III

(85+) All 65+

2001 53.0% 57.5% 64.6% 55.5%

2003 50.4 60.5 53.8 53.8

2005 43.3 52.4 52.3 46.8

2007 38.1 43.5 53.0 41.5

2009 37.2 43.9 46.3 40.5

Category I

(No Deficit)

Category II

(Deficit

10%

& 25%

& 50%

& 75%)2001 44.6% 6.4% 7.1% 10.8% 8.5% 22.7%

2003 46.4 5.8 8.4 10.7 6.4 22.3

2005 53.3 7.3 7.6 9.5 5.6 16.8

2007 58.7 6.0 6.9 8.0 4.8 15.5

2009 60.0 5.5 7.5 7.8 4.9 14.3


* Income Deficit =(Income - Expenditure)/Income.

No Deficit Deficit No Deficit Deficit

2002 $304,939 $152,061 $149,682 $48,480

2004 294,270 156,994 138,480 47,891

2006 336,866 157,793 157,285 41,078

2008 323,334 152,053 139,656 39,113

2010 260,000 136,200 118,300 33,500

Quartile 1 Quartile 2 Quartile 3 Quartile 4

2001 86.5% 72.5% 50.5% 19.8%

2003 81.9 73.1 47.5 22.2

2005 72.0 54.3 37.5 15.0

2007 68.2 51.9 27.5 10.0

2009 66.4 50.9 29.2 6.8

Figure 10

Percentage of 65+ Households With

Household Incomes Less Than Household

Expenditures, By Income Quartile


Study (HRS).

Figure 9

Longitudinal Change in Median Total

Household Wealth and Nonhousing Wealth

(in 2010 $s) for Those 65+ in 2001Total Wealth Non-Housing Wealth


Study (HRS).

Percentage of Households With Household

Incomes Less Than Household Expenditure,

by Age Groups I-III

Figure 7


Study (HRS).

Figure 8Percentage of Age 65+ Households With

Different Degrees of Income Deficit*



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First, it can be noted that the median total expenditures are higher for households with income deficits than for

households without such deficits. Even though households with deficits are more concentrated in lower-income groups,

their median spending is higher than households without deficits, which are concentrated in the upper-income quartiles.

High spending is clearly a large part of the problem, but what items drive this spending? It can be noted that there are

two categories in which households with deficits consistently outspend households without deficits, and by large

amounts: home-related expenses and health expenses. Expenditure on food items is also consistently higher for

households with deficits, although the differences are not as large as home- and health-related expenses. Median

spending on discretionary items like entertainment is higher for households without deficits but the differences are

small.

Does a Pension Make Any Difference?

A pension provides a steady source of income, which might help a household better plan its expenses. But are

households without pensions more likely to run into income shortfalls? Figure 12 shows the percentages of households

with income deficits among households that receive pension incomes and those that do not. In all the years between

2001 and 2009, the share of households with income deficits was much higher for households without any pension

income. For example, in 2001, almost 46 percent of households with pensions faced income deficits, while 66.3 percent

of households without any pension income faced income deficits. The share decreased over time for both types: In

2009, 28.5 percent of households with pensions and 49.3 percent of households without pensions faced incomedeficits. Notably, the difference in share of income-deficit households between pensioned and non-pensioned

households remained almost unchanged during the period studied: In 2001, the difference was 20.4 percentage points,

which increased to only 20.8 percentage points in 2009, although there were smaller differences in between.

Demographic Differences

Figure 13 shows how the percentage of households with income deficits varies between couple and single households

that have members age 65 or older. As expected, single households are much more likely to face income deficits. For

example, in 2001, almost 65 percent of single households had income deficits, compared with 45.6 percent of couples,

a difference of almost 20 percentage points. By 2009, the share of such households dropped to 47.4 percent among

singles and 32.8 percent among couples, a difference of almost 15 percentage points.

Figure 14 shows how the percentage of households age 65 or older with income deficits varies across different races.

The three different races considered are whites, African-Americans, and Hispanics. Among these three races, whites

had the lowest percentage of households with income deficits, 53.3 percent in 2001, dropping to 39.3 percent in 2009.

African-Americans and Hispanics had much larger shares of such households. In 2001, 72.5 percent of African-

American households and 70.2 percent of Hispanic households had income less than their expenses. In 2009, those

percentages dropped to 47.1 percent and 48.1 percent, respectively. So even though the difference between African-

Americans and Hispanics did not change much during the 20012009 period, the difference between whites and the

other two races dropped significantly during the same period.

ConclusionThis study examines the trends and composition of retirement income and estimates the proportion of older households

that are not able to meet all their expenses with current income. It also studies their asset decumulation patterns and

some demographic characteristics.

The key findings of the study are:

For all age groups above 65, Social Security remains the primary source of income. In 2009, households ages

6574 and households with members age 85 or above received 54 percent and 66 percent of their total

household incomes, respectively, from this source.


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The importance of Social Security income increases with age. For households that had members ages 6569 in

2001, the share of household income derived from Social Security rose from 47 percent in 2001 to almost

60 percent in 2009.

Income from pensions and annuities is the second-largest source of income for older households. In 2009,

households ages 6574 received 17.1 percent and households above age 85 received 15.3 percent of their

incomes from pension and annuities.

In 2009, two-fifths of households with members age 65 and above had incomes less than their expenditures

meaning they had deficits.

In 2009, 14.3 percent of households with members age 65 and above had spending that exceeded 75 percent of

their household incomes. Households that face income shortfalls also have much lower level of assets, and they

spend down their liquid assets at a faster rate than households with no income shortfalls.

The probability of running into an income shortfall is much higher for those with lower incomes. In 2009,

66.4 percent of households age 65 or older in the bottom-income quartile faced income deficits, while only

6.8 percent in the top-income quartile faced such shortfalls.

Median home and health-related expenses, as well as median total expenses, are much higher for householdsthat face income shortfalls, even if they have lower levels of income.

Singles, households with no pensions, African-Americans, and Hispanics have larger shares of households with

income deficits.


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Home Health Food Transport Clothing Entertainment Other Total Exp.

2001 $7,830 $2,887 $2,954 $2,585 $492 $2,332 $1,846 $26,103

2003 8,638 3,128 3,199 2,992 827 2,576 1,564 28,669

2005 8,907 2,799 2,901 2,924 669 1,895 1,339 26,710

2007 9,933 2,616 2,816 3,153 643 2,123 1,241 27,6302009 9,872 2,763 3,048 2,640 609 1,838 1,117 26,187

2001 9,708 4,055 3,200 2,502 517 1,791 1,311 31,039

2003 12,300 3,943 3,555 2,947 995 2,303 1,439 37,221

2005 12,277 3,949 3,481 3,275 781 1,897 1,015 34,791

2007 13,507 3,505 3,279 2,994 735 1,939 1,037 35,508

2009 12,498 3,718 3,434 2,895 609 1,666 1,143 33,290


Pension No Pension

2001 45.9% 66.3%

2003 47.7 60.7

2005 38.7 54.9

2007 33.8 49.6

2009 28.5 49.3

Single Couple

2001 64.99% 45.59%

2003 63.1 45.8

2005 53.6 39.2

2007 50.5 31.2

2009 47.5 32.8

Percentage of 65+ Households

With Household Incomes Less

Than Household Expenditures,

by Single/Couple Status

Source: Employee Benefit Research Institute

estimates from Health and Retirement Study (HRS).

Figure 12

Percentage of 65+ Households

With Household Incomes Less

Than Household Expenditures,by Pension Status

Source: Employee Benefit Research Institute

estimates from Health and Retirement Study (HRS).

No Deficit

Deficit

Median Expenditure (in 2010 $s) in Each Spending Category

for 65+ Households, by Income Deficit

Figure 11

Figure 13

White African-American Hispanic

2001 53.3% 72.5% 70.2%

2003 52.5 62.7 60.7

2005 45.1 60.2 54.4

2007 40.6 47.1 45.4

2009 39.3 47.1 48.1

Percentage of Age 65+ Households With Househol d

Income Less Than Househol d Expend itures, By Race

Figure 14

Source: Employee Benefit Research Institute estimates from Health and

Retirement Study (HRS).



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ebri.orgIssue Brief


References

Banerjee, Sudipto, Expenditure Patterns of Older Americans, 2001-2009, EBRI Issue Brief, no. 368 (Employee

Benefit Research Institute, February 2012).

Gustman, Alan, Thomas Steinmeier and Nahid Tabatabai, Mismeasurement of Pensions Before and After

Retirement: The Mystery of the Disappearing Pensions with Implications for the Importance of Social Security

as a Source of Retirement Support, NBER Working Paper # 18542 (November 2012).

Hurd, Michael, and Susan Rohwedder. Economic Preparation For Retirement, NBER Working Paper # 17203

(July 2011).

Endnotes

1http://hrsonline.isr.umich.edu/index.php?p=docs


18/20

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Income Composition, Income Trends, Income Shortfalls of Older Households

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