A Good Time to Be Gray

The '90s were fat city for retirees. Now, though, rising health-care costs could take away some of those gains

If you want to raise the collective heart rate in the rec room at an old folks home, just ask how much they shelled out on their last visit to the pharmacy. You'll hear numbers that would quicken anybody's pulse.

Still, anger over rapidly mounting medical bills has obscured a simple fact: The elderly prospered in the 1990s. According to Census Bureau data released on June 4, the poverty rate among those 65 and older fell much faster than it did in other age groups in the previous decade. It's true that the elderly are paying much more out of their own pockets to cover medical expenses than they did even a few years ago. But so far, these higher costs have come at a time when postretirement incomes seem to be holding up well.

Of course, the good fortune of today's older Americans may not be handed down to future retirees, whose numbers could overwhelm Social Security. "This generation of elderly will probably have it the best of any generation, either before or after," says Edward Wolff, New York University economist and author of a recent pessimistic study on retirement prospects for baby boomers.


  Still, today's seniors were certainly big winners over the past decade. People aged 65 and older below the poverty line amounted to 9.9% of the elderly population in 1999. That's almost three percentage points lower than the 12.8% of old folks who lived in poverty in 1989. By comparison, the elderly poverty rate was 25.3% in 1969.

The elderly fared far better than other age groups in the 1990s. The poverty rate for children under 18 dropped from 17.9% to 16.1% -- a big decline, but still less than for the elderly. And the poverty rate for ages 18 to 64 actually rose slightly, from 11.2% in 1989 to 11.3% in 1999. "The elderly have the lowest poverty rates in the country," says Daniel McFadden, a Nobel laureate and economist at the University of California at Berkeley who is gathering data for a new study of the elderly.

A Good Time to Be Gray
Many people who retired in the 1990s absorbed only a small hit to their living standards. The average replacement ratio -- retirement income as a share of peak aftertax lifetime income -- approached 87% in 1999, reports a new study by James Smith, a Rand Corp. economist. That's up from about 80% in 1989. The poor do even better. After paying taxes, the bottom 25% income bracket of elderly households can replace its entire pre-retirement income, reports Smith, leaving them "at least as well off as they were in their 50s."


  The improvement in older Americans' incomes is broad-based. Average income from Social Security rose by 12% in the decade, after adjusting for inflation. Meanwhile, the new census data contains good news about pension benefits other than Social Security, such as defined-benefit and 401(k) plans. More of the elderly received them -- 53% in 1999, vs. 49% in 1989 -- and the average pension benefit was 45% bigger in real terms.

Of course, the bear market hit many of the wealthier elderly. But those losses mainly hurt the top 30% to 40% of older Americans. "The remainder never had much wealth," says Smith.

More worrisome is that seniors' out-of-pocket health-care costs are rising faster than their incomes. Since 2000, prescription-drug costs not covered by insurance rose almost 30% for the average person over 65, from $813 to $1,051 a year, according to Patricia Neuman, director of the Medicare Policy Project at the Henry J. Kaiser Family Foundation in Washington.


  Prescription drug costs aren't all that's rising. By 2005, the elderly will pay 25% of their income, on average, for medical expenses, including premiums for Medicare, estimates Marilyn Moon, a senior fellow at the Urban Institute, a Washington think tank. That's up from 22% in 2000. "Health-care costs will continue to rise as a share of people's incomes, no matter what," she says.

For now, though, the aged seem to be faring well in America. If their out-of-pocket medical costs continue to rise faster than their incomes, however, they may look back on the '90s as the golden age of retirement.

By Margaret Popper in New York

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