The economic well-being of elderly people and children in a changing society.

Ozawa, Martha N.

Social policy in the 20th century has been a triumph for elderly Americans. Starting with the Social Security Act of 1935, the federal government has taken a strong leadership position to ensure income and health security for elderly people. The Old-Age Insurance program, enacted in 1935, and the Supplemental Security Income program, enacted in 1972, created a strong and effective safety net. The 1965 amendments to the Social Security Act established Medicare - a publicly financed health insurance program for elderly people - and Medicaid, which allows low-income elderly people to supplement Medicare. In addition, the Employee Retirement Income Security Act of 1974 (ERISA) (P.L. 93-406) provided greater security for private pensions.

All these programs were developed and expanded before the 1970s, when the U.S. economy was still growing and productivity was improving. At the same time, demographic conditions were such that there were ample workers to support the elderly population. During the past quarter of a century, however, the situation has changed. As the elderly population has grown, the population of children has shrunk in relation to the other age groups. In the meantime, U.S. society has become more diverse, and the globalization of the economy is pressuring political leaders to downsize the scope of social welfare expenditures. Thus, the United States is facing challenges on two fronts at the same time: to maintain its obligation to support the growing population of elderly people and to invest in children to prepare for the increasing international economic competition in the coming decades.

Under these dynamically changing circumstances, it behooves policymakers to engage in a balancing act to provide for the growing elderly population on the one hand, and to invest in children on the other hand. Future social policy for elderly people, therefore, cannot - and should not - be developed independent of social policy for the rest of the population, especially children.

This article addresses the changing economic status of the elderly population, but pays attention to tile changing economic status of the rest of society, especially children. Furthermore, it discusses social policy for elderly people in the context of demographic changes that are taking place in the United States.

Demographic Changes in the United States

The U.S. population is aging at a relatively rapid pace, although not at fast as the populations of other industrializedcountries, such as Japan and Germany (Koseisho, DaijinKambo Seisakuka, 1990;Ozawa & Kono, 1997). Theproportion of people age 65and over will increase from 12.8 percent in 1995 to 20.7 percent in 2040 and then decrease slightly to 20.4 percent in 2050. In contrast, the proportion of children in the population will shrink from 26.2 percent in 1995 to 23.4 percent in 2050 (U.S. Bureau of the Census, 1993).

The diversification of the population is taking place in tandem with the aging of the population. During the next five decades, the U.S. population will be 52.5 percent white, with the rest of the population composed of Hispanics, African Americans, Asians, and American Indians. In 2050 white children will be in the minority (42.3 percent). The largest increase in the proportion of children will be among Hispanic children (from 13.7 percent in 1995 to 28.1 percent in 2050) and Asian children (from 3.8 percent in 1995 to 10.1 percent in 2050) (U.S. Bureau of the Census, 1993). In contrast, the change in the racial-ethnic composition among elderly people will be less drastic than among children. Fifty years from now the white elderly population still will be a large majority (66.9 percent in 2050, compared with 85.3 percent in 1995) (U.S. Bureau of the Census, 1993).

In the meantime, the total dependency ratio (the number of children and elderly people divided by the number of working-age people, multiplied by 100) will begin to increase as the baby boomers begin to retire. It is projected that the ratio will decline from 63.9 in 1995 to 60.9 in 2010, but will increase to 67.3 in 2020, to 77.9 in 2030, and to 78.1 in 2050. The old dependency ratio (the number of elderly people divided by the number of working-age people, multiplied by 100) will increase from 20.9 in 1995 to 21.5 in 2010, to 27.4 in 2020, to 35.7 in 2030, and to 36.4 in 2050. More important, the ratio of the elderly population to the population of children is expected to increase drastically. In 1995 there were 48.7 elderly people per 100 children; in 2050, this ratio will surge to 87.3.

The situation of the white population will be extreme. Whereas there were 62.5 white elderly people per 100 white children in 1995, there will be 138 white elderly people per 100 white children in 2050 (U.S. Bureau of the Census, 1993).

These demographic changes indicate that in the future elderly people, the majority of whom still will be white, increasingly will be supported by populations of color. At the same time the burden of supporting each retired person will be placed on fewer and fewer workers. The trustees of the federal Old-Age and Survivors and Disability Insurance (social security) trust funds projected that in 2030, two workers will have to support each social security beneficiary, compared with 3.2 in 1996, and that this number will decline further to 1.9 in 2050 (Board of Trustees, 1996).

Economic Well-Being of the Elderly Population and Children

The elderly population has come a long way toward economic self-sufficiency, primarily because the social security program not only has matured, but also has expanded its provision of benefits. Smolensky, Danziger, and Gottschalk (1988) observed that from 1960 to 1980 the mean social security benefit for retired couples increased from 37 percent to 55 percent of the male mean earnings, from 81 percent to 134 percent of the poverty-line income for an elderly couple, and from 162 percent to 190 percent of the average payment for a family of three by Aid to Families with Dependent Children (AFDC).

Thanks primarily to legislative initiatives to support the elderly population, the income status of elderly people improved greatly. Table 1 presents findings from a study by Ozawa and Kim (1998) on the trends in the income status of elderly people, children, and working-age adults. Income status means the level of family income adjusted for family size, operationalized as family income divided by the poverty-line income of a family with a particular number of members. This indicator is referred to as the "income-to-needs ratio," or simply the "poverty ratio." The income status of elderly people has risen greatly relative to that of working-age adults or children.

In 1969 elderly people were living at 2.44 times the poverty-line income, which was the lowest among the three age groups. But from 1969 to 1989, their income status improved by 36 percent, compared with 20 percent for working-age adults and 15 percent for children. [TABULAR DATA FOR TABLE 1 OMITTED] Thus, although the elderly population lived with a slightly lower income level than did children in 1969, their level of income was 17 percent higher than that of children in 1989. The differential in the income status of elderly people and working-age adults narrowed from 27 percent in 1969 to 17 percent in 1989.

In contrast, children's income status lost ground both in relation to elderly people and to working-age adults. As a result, in 1989 children's income status was only 71 percent of that of working-age adults and 86 percent of that of elderly people.

The improvement in the economic status of elderly people also can be shown by their declining poverty rate. In 1974 the poverty rate of elderly people became lower than that of children, a trend that continued, so that in 1992 the poverty rate of elderly people was only 59 percent of that of children [ILLUSTRATION FOR FIGURE 1 OMITTED]. In other words, by 1992 the poverty rate of children was 1.7 times the poverty rate of elderly people.

The economic well-being of the elderly population also can be indicated by how effectively the safety net is working for them. Ozawa and Lum (1996) found that in the absence of social insurance benefits (social security and unemployment benefits) and welfare payments (all means-tested cash payments and food stamps), the median income status of poor elderly people would be only 1 percent of the poverty-line income. After the distribution of social security and unemployment insurance benefits, the median income status of elderly poor people surges to 70 percent of the poverty-line income (Table 2). After the distribution of welfare payments and food stamps, this median income status further increases to 81 percent of the poverty-line income. More important, after the distribution of all benefits, the income inequality decreased greatly: The Gini coefficient (which ranges from 0 to 1, with 0 indicating perfect equality and 1 indicating perfect inequality) decreases from .791 to. 134 (Ozawa & Lum, 1996).

The safety net is not working so well for children. In the absence of these benefits, the median income status of poor children would be 19 percent of the poverty-line income. After the distribution of social security and unemployment insurance benefits, the median income status of poor children increases to 32 percent of the poverty-line income. After the distribution of welfare payments and food stamps, this median income status increases to 71 percent of the poverty-line income. After the distribution of all benefits, the Gini coefficient decreases from .581 to .198 (Ozawa & Lum, 1996).

As was indicated, there is an enormous disparity between the income status of elderly people and that of children. Furthermore, these average figures obscure the differences within each population according to race, marital status, and living arrangement. A study by Ozawa and Kim (1998) indicated that the 1989 income statuses of black and Hispanic elderly people were only 57 percent and 71 percent, respectively, of the income status of white elderly people. Similarly, the 1989 income statuses of black and Hispanic children were only 52 percent and 55 percent, respectively, of the income status of white children.

There is a considerable disparity in the income status of elderly people according to their [TABULAR DATA FOR TABLE 2 OMITTED] marital status. Ozawa (1997c) found that 10 years after retirement, the income statuses of divorced elderly people, elderly people who were already widowed at retirement, elderly people who became widowed after retirement, and never-married elderly people were 56 percent, 64 percent, 77 percent, and 77 percent, respectively, of the income status of elderly people who were married throughout these 10 years. With regard to elderly women, Ozawa (1997c) found that the income statuses of divorced elderly women, elderly women who were already widowed at retirement, elderly women who became widowed after retirement, and never-married elderly women were 59 percent, 68 percent, 80 percent, and 87 percent, respectively, of the income status of elderly women who were married throughout these 10 years.

Furthermore, Ozawa and Kim (in press) noted an enormous disparity in the income status of children, depending on their living arrangements. They found that from 1969 to 1989, the income status of children from female-headed families, for example, declined from 46 percent to 42 percent of that of children from married-couple families.

The declining income status of children from female-headed families, relative to that of the income status of children from married-couple families, hides the hidden social policy forces that are at work. According to the study by Ozawa and Kim (in press), the pretransfer income status (the income status before the provision of social insurance benefits and means-tested cash payments) of children from female-headed families increased 31 percent from 1969 to 1989, compared with 24 percent for children from married-couple families. But the posttransfer income status of children of female-headed families increased only 14 percent, compared with 24 percent for children from married-couple families. As a result, although children from female-headed families gained ground economically compared with children from married-couple families on the basis of pretransfer income status, they lost ground on the basis of posttransfer income status.

Ozawa and Kim (in press) argued that the reasons for the failure of children from femaleheaded families to improve their posttransfer income status as much as they improved their pretransfer income status were twofold. First, the probability of female-headed families with children being covered by survivors insurance declined, both absolutely and proportionately, during the years under investigation, because more families were headed by women, not because of the death of their breadwinners but because of separation, divorce, or nonmarriage (Social Security Administration, 1996).

Second, the incorporation of income testing into AFDC made it impossible to improve the posttransfer income status, commensurate with the improvement in the pretransfer income status, because welfare programs reduced payments as income rose. The failure of most states to upgrade welfare payments to adjust for increases in the cost of living further compounded the economic difficulty faced by many children from female-headed families on AFDC (Solomon, 1991). In addition, the change in the AFDC benefit-reduction rate from 67 percent to 100 percent, which was put into effect under the Omnibus Budget Reconciliation Act of 1981 (OBRA) (P.L. 97-35), made the situation worse: A $1 increase in earnings would result in no increase whatsoever in family income (posttransfer income), because an increase of $1 in earnings would result in the reduction of AFDC payments by $1.

Problems Ahead

The foregoing discussion indicates that the income status of elderly people increased handsomely, but the income status of children increased only slightly during the past two decades. Thus, the income status of children relative to that of elderly persons declined during this period. Furthermore, there is considerable variation in the income status within the populations of elderly people and children, by race, marital status, and living arrangements. The projections for the future seem to paint an even bleaker picture.

Demographic shifts will cause the income status of children to decline. They will create a "ratchet-down effect" on the income status of children. Ozawa (1997a) found that if policymakers attempt to double the income status of each racial and ethnic group of children in 50 years, then the entire population of children will come short of achieving that goal by 10.1 percent. This discrepancy - the ratchet-down effect - will be due purely to the changes in the racial-ethnic composition of children in 50 years; that is, even if each racial and ethnic group of children meets the goal of doubling its income status, the population of children as a whole cannot (Ozawa, 1997a). In contrast, the ratchet-down effect on the income status of elderly and working-age adults will not be so severe: 3.9 percent for the former and 7.9 percent for the latter.

Because of the strong ratchet-down effect on the income status of children, the income status of children relative to that of elderly people is expected to decline further during the coming five decades. Again, according to Ozawa's (1997a) calculations, the income status of children is expected to decline by 6.5 percent from its already lower level, relative to the income status of the elderly population.

Given such a projected ratchet-down effect, it would be in the national interest to target children of ethnic minority groups for social policy interventions to improve their income status, as well as their human capital, because these children will be the source of growth in the U.S. labor force in the future.

Ozawa's (1997a) calculations are solely about the effect of demographic shifts. In addition, society needs to anticipate changes in the living arrangements of children and in the distribution of earnings between younger and older workers and between low-skilled and high-skilled workers. The proportion of children who live only with their mothers may increase further. Although the earnings of mother-only families have risen, they are still far behind earnings of married-couple or male-headed families (Ozawa & Kim, in press). If past evidence is a guide, young workers will continue to loose ground in their earnings capability relative to older workers, and less educated workers will loose ground in their earnings capability relative to more educated workers (Murphy & Welch, 1993). All these anticipated changes will compound the decline in the income status of children.

In the face of the deteriorating income status of children, social policies that affect children have not been hospitable. In the eyes of policymakers, income security for children has not been a high political priority. Thus, no income support program addresses the income needs of all poor children adequately. For example, AFDC, which was terminated and became a part of Temporary, Assistance to Needy Families (TANF) as a result of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (P.L. 104-193), ignored children who lived in married-couple households or in maleheaded households. Its payments were low and insecure, compared with Supplemental Security Income (SSI), which largely benefits disabled adults and poor elderly people. Except in a few states, AFDC provided no cost-of-living increases, as mentioned earlier. As a result, the median state AFDC payment level declined 47 percent in real terms from 1970 to 1994 (U.S. House of Representatives, 1994). Furthermore, the parents of poor children were never encouraged to apply for AFDC in the way elderly people have been encouraged to apply for SSI through outreach programs, as mandated by the 1983 amendments to the Social Security Act and the 1989 Omnibus Budget Reconciliation Act (P.L. 101-239), although the U.S. Supreme Court decision in Sullivan v. Zebley (1990) prompted the development of outreach programs in SSI for children as well.

Since welfare reform was fully implemented in July 1997, children on welfare face a two-year limit to cash payments during any period of welfare dependence, after which their mothers are required to engage in some form of work, and the children are subject to a five-year limit to such payments during the course of their mothers' lifetimes. Furthermore, children who were formerly eligible for SSI on account of behavioral problems are no longer eligible, and the individual functioning assessment was eliminated from the procedure to establish eligibility for SSI for children with mental illness. In addition, children of immigrants (legal or illegal) are barred from most means-tested programs, including Medicaid.

Welfare reform reflects negative attitudes toward and a disdain for female-headed families with children (Abramovitz, 1995; Gordon, 1996). Unfortunately, the public's view of these mothers' work efforts is erroneous. As was discussed earlier, the income of female-headed families with children has increased enormously, when measured by their pretransfer income, reflecting the significant growth in earnings capabilities. Sadly, these families' pretransfer income is invisible to the public; what the public sees is their posttransfer income.

In light of the economic difficulties that children are having, federal expenditures for the elderly population and for children have long been out of balance. The total federal spending (in 1990 dollars) per elderly person increased from $3,860 in 1965 to $13,190 in 1995, whereas the total federal spending per child was $1,020 in 1990 and $1,400 in 1995 (Table 3) (U.S. House of Representatives, 1993).

Perhaps the lop-sided federal expenditures for elderly people should be tempered by relatively large spending for education by state and local governments. It is estimated that 56 percent of all state and local social welfare expenditures are for education, of which 78 percent are for elementary and secondary education. Put in perspective, however, state and local expenditures for elementary and secondary education are 3.7 percent of the Gross Domestic Product (GDP), whereas federal expenditures for social security alone are 4.9 percent of the GDP (see Bixby, 1992; Ozawa, 1995a; Social Security Administration, 1996; U.S. House of Representatives, 1993).

The hostile public stance on social policy that touches children's lives is in stark contrast to the benign public stance on social policy for elderly people. Although policymakers are concerned about the growth in Medicare expenditures, no harsh voice has been heard with regard to the continuation of social security, which plays an important role in replacing income lost because of retirement and in providing an effective safety net for elderly people.

Table 3

Federal Spending for Elderly People and Children, 1965-95 (in 1990
dollars)

 Per
 elderly Per
Year person child

1965 3,860 -
1971 6,540 -
1975 8,500 -
1980 8,620 -
1985 10,370 -
1990 11,290 1,020
1995 13,190 1,400

NOTE: - = data not available.

SOURCE: U.S. House of Representatives. (1993). pp. 1564, 1567.

Where Do We Go from Here?

I have argued that there is a growing imbalance in the income status of elderly people and children and that policymakers have used a double standard to address the income security of these groups. When the traditional family was the norm and the U.S. economy could be self-contained without being subjected to global economic competition, social policy for elderly people and for children could be established according to different standards. However, given the growing economic uncertainty, the growing variation in the living arrangements of children, and the great demographic transformation that the United States is going through, it seems imperative for policymakers to deal directly with the issue of the income security of children - just as theydid for the elderly populationin 1935, when they enacted the Social Security Act - sothat the United States will havea set of programs that can en-sure that the level of income security for children is comparable to that of elderly people.

On one front, the plight of elderly widows and divorced women continues to be of concern to policymakers, even though the average income status of all elderly people improved greatly. Recognizing the complex economic situation that women face in old age, the report of the Long-Term Reform Subcommittee of the Save the Social Security Coalition Women's Issues Committee (1996), Making Social Security Work Better for Women, struck a balance between its concern for the financial needs of widows and divorced women and its concern for assisting women as individual workers. In particular, it recommended that a voluntary 125-percent survivor-benefits option (that is, that 125 percent of the primary insurance amount [PIA] be added to the benefit provisions; that a basic minimum benefit, which depends on the years of employment, be established; that the benefit for divorced spouses be increased from the current 50 percent to 75 percent of the PIA; and that the benefit for spouses be scaled according to the number of years of marriage).

Because divorced women face considerable financial difficulty in retirement, the idea of an earnings sharing plan, which was hotly debated in the 1970s and 1980s, should be put to public scrutiny once again (Burkhauser & Holden, 1982; Ozawa, 1980, 1982; U.S. Department of Health, Education, & Welfare, 1979). Under this plan annual earnings by a husband and a wife would be combined into earnings for the couple and then divided each year and credited to the account of each spouse until one spouse reaches age 62 (Ozawa, 1980). This plan automatically deals not only with financial risks that women face as divorced or widowed persons, but also with the internal redistribution of earnings credits to women from men, who generally earn more.

On another front basic income security for children should be established. As I have argued in this article, the decline in the income status of children is largely structural, and it is caused by economic and demographic forces. Thus, it seems to be in the public interest to address the income security for children on its own terms, independent of social policy for their parents. Furthermore, to make a clear break with the harsh ideology embedded in welfare, policymakers should develop programs for children that are outside the welfare system. That is, policymakers should establish a "third pillar," to be added to the two pillars of the current income security system (Ozawa, 1995b). The first pillar represents social insurance programs, which greatly benefited the elderly population, and the second pillar represents public assistance programs, which failed to address the income security of children adequately. The third pillar represents the nation's commitment to investment in children. Programs that fall in this category may take various forms, including tax credits, demogrants (such as children's allowances), free medical care, and equal access to quality education.

For the immediate future, I recommend a system of income security programs for children that would consist of a $1,000 refundable tax credit, an improved earned income tax credit (EITC), and an inflation-proof minimum wage. The improved version of the EITC would have three rates of earnings subsidies: (1) a rate for families with one child, (2) a rate for families with two children, and (3) a rate for families with three or more children. Currently, the EITC has only two rates. According to calculations by Ozawa (1997b), these three programs together could pull all but a small percentage of poor families with children out of poverty.

The $500 tax credit, $1,500 tax credit for college expenses for two-year college, followed by a 20 percent tax credit for up to $5,000 of expenses for third and fourth years of college, and the expanded health care coverage for low-income children, which were included in the Balanced Budget Act of 1997 (P.L. 105-33) and the Taxpayer Relief Act of 1997 (P.L. 105-34) that President Clinton signed into law on August 5, 1997, are all steps in the right direction. But these programs constitute only a beginning of a long travail for the United States to establish a viable third pillar in its income security system.

Conclusion

A nation that fails to nurture its offspring can only anticipate a bleak future. The United States seems to be heading to such a future. This nation has done a respectable job of ensuring the health and income security of elderly people, but it has neglected that of children. Although the plight of children is partly a result of the undesirable behavior and maladjustment of their parents, it is caused largely by forces that are beyond their parents' control.

The divergence of the economic fortunes of the elderly population and children should be of concern to policymakers in all industrialized societies. Unless a nation ensures that children are nurtured in an economic environment that is comparable to that of their elders and of working-age adults, it will be incapable of generating the workhorse that can invigorate its economy.

Some nations, such as Japan, are recognizing this predicament. Japanese policymakers recognize that Japan, which has a low birthrate, is destined to decay, economically and culturally. In that country, too, the economic status of children has declined relative to that of elderly and working-age adults. To deal with these issues, Japanese policymakers have established highlevel committees in the national government's ministries and among industrial, academic, and media leaders (Ozawa & Kono, 1997).

To deal with the demographic crisis, sweeping changes in the tax treatment of children have been recommended by Hideo Ibe, a former Commissioner of Social Insurance in Japan (Ibe, 1996). In particular, he recommended that a family should be allowed to deduct [yen]5,000,000 (about $40,000) from its taxable income in the year of the first child's birth and [yen]1,000,000 ($8,000) per year thereafter until the child reaches adulthood. The birth of the second child would entail an additional deduction of [yen]3,000,000 ($24,000) each year until that child reaches adulthood. If a woman bears three or more children before age 35, the woman should be entitled to a deduction of [yen]5,000,000 ($40,000) a year for life. All this means that most women who bear three or more children would not have to pay income taxes for life!

I especially call on the leaders of the elderly population in the United States. For the revitalization of this nation, they should get involved in the drive to channel more resources to children, to improve the quality of life of children, and to increase the socialization of children - rich and poor - of all ethnicities. It would be particularly telling, in this age of interest-group politics, if the elderly population could rise above sectorial politics and see clearly what is really at stake for the United States as a whole. By so doing they can help this nation enter a new century, in which a better balance in the living conditions of the elderly population and children can be established. And this balance is the key to the survival of the United States.

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Martha N. Ozawa, PhD, ACSW, is Bettie Bofinger Brown Professor of Social Policy, George Warren Brown School of Social Work, Washington University, Campus box 1196, St. Louis, MO 63130-4899; e-mail: awazo@gwbmail.wustl.edu. An earlier version of this article was presented as the 17th Annual Leon and Josephine Winkelman Lecture at the University of Michigan School of Social Work; Ann Arbor, December 2, 1996.