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February 22,1974 Within a relatively short time-span, the nation has made some dramatic changes in the way in which it sup ports its aged population. Policy makers have adopted major im provements in social security and in public and private pension plans, partly to bring about a more ade quate level of income for retirees and their dependents, and partly to ensure that their incomes are also protected against inflation. But like other revolutions, this quiet revolu tion of the aged is bound to be a costly one. Through much of the 1960's the number of aged poor generally fell, but only at a moderate pace. Then, however, the aged poor declined from 241 to 181 percent of the /2 /2 65-and-over population between 1970 and 1972 alone. Still, poverty remains more of a problem among the elderly than among the general population, where about 12 percent fall below the low-income level. Guaranteed minimum One of the major steps in ensuring income adequacy was the institution this January of a national minimum income for the aged, blind and dis abled, under the Supplemental Se curity Income program (SSI). In 1973, almost 2 million aged relied on state public-assistance programs for aid, and about 60 percent of them were in poverty. This year they began to receive Federal checks directly— $140 monthly for a single person and $210 monthly for a couple, with benefits increasing after midyear. (Some states that had paid higher benefits may provide additional income supplements to SSI recipients.) Federal costs for ex isting programs amounted to about $21 billion in 1973, but these /2 should rise to over $5 billion this year with the guarantee of a Federal minimum income. Nonetheless, the primary source of increased income has been the rapid expansion of old-age and sur vivors insurance benefits. In 1973, that program provided $42 billion in benefits to 25 million recipients. About one-sixth of these bene ficiaries still fell below the poverty line last year, but their number should now decline with the rapid expansion of OASI benefits and the institution of SSI. Over the 1971-73 period alone, minimum benefits for a worker retiring at age 65 jumped 54 percent, and they will rise 11 percent more after two further in creases this March and June. OASI payments in the aggregate are now about four times greater than in 1960. Pension reform Further moves in the direction of basic income adequacy may come from the pension-reform movement, which is now bearing fruit in Con gressional legislation. (The Senate passed reform legislation last ses sion, and the House is considering the bill this year.) Today, only about half of all workers aged 50 or over with at least 10 years' employment have vested (nonforfeitable) rights to retirement benefits; moreover, over half of all multi-employer plans (continued on page 2) Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. lack vesting provisions completely. The proposed legislation should at least make a start in improving vest ing, “ portability," and financing provisions. The average retiree today gets a pension that amounts to roughly 25 percent of his terminal or maximum salary. In Europe most pensioners get 50 to 70 percent of final pay, and the trend in this country is in the same direction. The landmark negotiations just concluded in the aluminum and container industries — with steel the next target— con tained a provision to assure retirees about 85 percent of their regular pay through combined pension and social-security benefits, as well as a provision to lower the regular re tirement age from 65 to 62. With negotiated increases of this type, and with legislative reforms, total pension costs may at least triple during the present decade— just as they did during the past decade, to $15 billion in 1970. breaker in this regard, with its pro vision of cost-of-living increases in pensions. Beginning in 1975, those who retire under this plan will re ceive periodic pension adjustments of about 65 percent of the increases in the consumer price index. This breakthrough in a major indus trial-union agreement tends to ratify the basic decisions already taken in the public sector. Since 1963, mili tary pensions have been adjusted automatically by the behavior of the consumer price index, and similar adjustments have been made since 1965 in pensions for Federal civilservice retirees and their benefi ciaries. Until the late 1960's Congress increased social-security benefits periodically to permit retirees to keep abreast of inflation. (The more recent increases went much further and increased retirees' real income.) But beginning next year, socialsecurity benefits will be increased annually to reflect increases in con sumer prices. Protection against inflation Other support Retirees are increasingly successful in reaching their goal of inflationproof pensions, along with their goal of basic income adequacy. The aluminum settlement was a path- With the introduction of Medicare and Medicaid in 1965, the aged have begun to receive substantial increases in real income. Medical bills of persons over 65 tend to be much higher than those of younger age groups, so by shifting the bur den of these bills from the individual to the public, the social-security program has effectively reduced the cost of living for the aged. The Medicare program paid $9 billion in © =S=5 c *=5 © 1973 for hospital and other medical services for the aged, while Medic aid paid out over $4 billion for services for the medically indigent, including some aged as well as other recipients. Benefits for both programs together have increased about 14 percent annually in recent years. Some beginnings meanwhile have been made in protecting the asset holdings of the aged. Over half of all elderly persons own their homes, mostly mortgage free, and thus they have experienced an increase in property values because of infla tion. However, they have also ex perienced sharp increases in main tenance costs, insurance rates — and property taxes. (In 1970, home owners generally paid about 31 /2 percent of their income in realestate taxes, but elderly homeown ers paid over 8 percent for this pur pose, and the average was an unbe lievable 30 percent for low-income elderly homeowners in the North east.) Some states are now acting to relieve the overburden of the property tax, primarily by shifting the burden of school financing from the local property tax to state income and sales taxes. joint employer-employee contribu tions for social insurance have risen from 71 to 131 percent of total /2 /2 wages and salaries; while employer contribution to pension programs (wage supplements) have risen from 7 to 10 percent of the total wage bill. In coming years, higher socialsecurity taxes will be applied to a steadily rising taxable wage base, and in the private sector, higher em ployer contributions will be re quired to pay for the extension of more liberal pension agreements. Demographics will ease the prob lem for a while, as the recent babyboom generation moves into the prime working-force age brackets, leading to a concentration of popu lation growth in those high-earning categories. Still, the 65-and-over group will rise from 9.8 to 10.6 per cent of the total population between 1970 and 2000, and the proportion should then rise sharply with the retirement of the post-World War II generation. The cost burden will increase even further if there is a continuation of the trend toward earlier retirement; universal retire ment at 55, for example, would be about as costly as putting the entire labor force on a 27-hour workweek. Paying the bill The cost of ensuring an adequate and inflation-proof income for all the aged will be met primarily by higher social-security and pension deductions from the paychecks of the working population. Since 1960, William Burke uoj8umse/v\ • qejn • uo8aJO • epeA3|s| • oqepi iib m e h • e m jo jjie j • Buozuy • e>|se|y p is m p T B d f o Q BANKING DATA— TWELFTH FEDERAL RESERVE DISTRICT (D o llar amounts in m illions) Selected Assets and Liabilities Large Commercial Banks Loan gross adjusted and investments* Loans gross adjusted— total* Securities loans Com m ercial and industrial Real estate Consum er instalm ent U.S. Treasury securities O ther Securities Deposits (less cash items)— total* Demand deposits adjusted U.S. Governm ent deposits Tim e deposits— total* Savings O ther time I.P.C . State and political subdivisions (Large negotiable CD's) Weekly Averages of Daily Figures Member Bank Reserve Position Excess Reserves Borrowings Net free ( + ) / Net borrowed ( —) Federal Funds— Seven Large Banks Interbank Federal funds transactions Net purchases ( + ) / Net sales ( —) Transactions: U.S. securities dealers Net loans ( + ) / Net borrowings ( —) Am ount Outstanding 2 /6 /74 Change from year ago D o llar Percent + + + 79,063 59,889 1,280 20,599 18,478 9,171 6,268 12,906 74,401 21,249 914 51,086 17,649 23,749 7,097 11,201 Change from 1 /30/74 + 9,025 + 8,244 - 602 + 2,438 + 3,183 + 1,191 - 650 + 1,431 + 7,071 + 920 12 + 6,247 - 602 + 5,964 + 570 + 4,214 — + + + + — — + + — — 289 43 211 67 33 21 210 36 721 174 259 316 24 8 303 68 + 12.89 + 15.96 31.99 + 13.42 + 20.81 + 14.92 9.40 + 12.47 + 10.50 + 4.53 — 1.30 + 13.93 3.30 + 33.53 + 8.73 + 60.31 W eek ended 2 /6 /7 4 W eek ended 1/3 0 /7 4 110 126 16 14 331 317 60 101 - 41 + 1,539 + 1,137 + 507 + + + 315 - 156 - 134 Com parable year-ago period ’ Includes items not shown separately. Information on this and other publications can be obtained by calling or writing the n * rit m->^PM_n'strat've Services Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, Digitized for FR A Sf R rancisco, California 94120. Phone (415) 397-1137. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis
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