February 2013 • No.

383

Income Composition, Income Trends, and Income Shortfalls

of 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 65–74 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 65–74 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
expenditures—meaning 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.

A monthly research report from the EBRI Education and Research Fund © 2013 Employee Benefit Research Institute
Sudipto Banerjee is a research associate at the Employee Benefit Research Institute (EBRI). This Issue Brief was
written with assistance from the Institute’s 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 be
used 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 .......................................................................................................................................................... 4 
Data ..................................................................................................................................................................... 4 
Income Composition .............................................................................................................................................. 5 
Income Comparison With CPS ................................................................................................................................ 7 
Change in Household Income ................................................................................................................................. 7 
Income Shortfalls .................................................................................................................................................. 9 
Change in Wealth ................................................................................................................................................ 11 
Income Shortfalls across Income Quartiles ............................................................................................................ 12 
Expenditure Patterns of Households with and without Deficits................................................................................. 12 
Does a Pension Make Any Difference? ................................................................................................................... 14 
Demographic Differences ..................................................................................................................................... 14 
Conclusion .......................................................................................................................................................... 14 
References .......................................................................................................................................................... 17 
Endnotes ............................................................................................................................................................ 17 

Figures
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 I‒III ............................................................................................................................................. 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

ebri.org Issue Brief • February 2013 • No. 383 3

Income Composition, Income Trends, and Income Shortfalls
of Older Households
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 Brief examines 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 most
comprehensive 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
55–64, 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.

 Labor income: sum of wage and salary income; bonuses, overtime pay, commissions, tips; second job;
professional-practice or trade income.

 Capital income: 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/Annuity income: 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 Security income: includes Social Security retirement, spouse, and widow or widower benefits.

 Other income: 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 respondent’s and spouse’s 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 65–74 (Age Group
I), 75–84 (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 income’s 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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 Figure 1
Median Income, in 2010 $s, from Different Sources, and Average
Percentage Share of Each Source in Total Income, by Age Groups
Ages 65–74 Ages 75–84 Age 85+
2001
% of Total % of Total % of Total
Mean Median Income Mean Median Income Mean Median Income
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/Annuity 10,358 649 18.6 8,871 1,418 19.2 4,454 0 12.9
Social Security 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
Total Income 50,975 34,192 35,015 25,112 24,199 16,761
2003

ebri.org Issue Brief • February 2013 • No. 383

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/Annuity 13,253 910 18.4 11,068 2,275 20.4 5,460 0 15.5
Social Security 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
Total Income 59,708 37,024 37,974 26,434 25,284 17,078
2005
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/Annuity 11,926 1,205 18.9 11,897 3,562 21.7 5,856 167 17.1
Social Security 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
Total Income 62,364 39,537 42,835 30,846 26,273 19,913
2007
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/Annuity 11,347 0 18.1 10,485 1,336 19.4 6938 0 16.7
Social Security 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
Total Income 61,269 41,001 43,766 30,647 41,152 20,122
2009
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/Annuity 11,612 0 17.1 9,682 0 18.4 4,917 0 15.3
Social Security 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
Total Income 52,970 37,201 43,187 29,626 25,741 19,623

6
Source: Employee Benefit Research Institute estimates from Health and Retirement Study (HRS).
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 of
income among households ages 65–69. 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 65–69 in 2001 (Cohort II), and ages 70–74 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 panel
aspect 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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 Figure 2
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)
OASDI (Social Security) Pension & Annuities Asset Income Labor Earnings Other
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.

Figure 3
Longitudinal Change in Total Household Income
(Median), in 2010 $s, for Different Age Cohorts
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 32,284
Cohort III 36,043 34,475 33,283 31,382 30,199
Source: Employee Benefit Research Institute estimates from Health and Retirement
Study (HRS).
Cohort I : Ages 60–64 in 2001.
Cohort II : Ages 65–69 in 2001.
Cohort III : Ages 70–74 in 2001.

Figure 4
Longitudinal Change in Share of Income from Different Sources,
for Those Ages 60‒64 (Cohort I) in 2001
60%

Labor Capital

50% Pension/Annuity Social Security

Other

40%

30%

20%

10%

0%
2001 2003 2005 2007 2009

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

ebri.org Issue Brief • February 2013 • No. 383 8

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 former’s share dropping from 12.3 percent in 2001 to 10.5 percent in 2009,
while other income’s 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 III’s 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 gross incomes 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 not
attempt 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 65–74 (Age Group I), 75–84 (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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 Figure 5
Longitudinal Change in Share of Income from
Different Sources, for Those Ages 65‒69 (Cohort II) in 2001
70%

60%

50%

40%
Labor Capital
Pension/Annuity Social Security
Other
30%

20%

10%

0%
2001 2003 2005 2007 2009

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

Figure 6
Longitudinal Change in Share of Income from
Different Sources, for Those Ages 70‒74 (Cohort III) in 2001
70%

60%

50%

Labor Capital

40% Pension/Annuity Social Security

Other

30%

20%

10%

0%
2001 2003 2005 2007 2009

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

ebri.org Issue Brief • February 2013 • No. 383 10

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 VI—meaning 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 deficits
of 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. It
might 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

ebri.org Issue Brief • February 2013 • No. 383 11

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 income
deficits: 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 can’t
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 expenses include mortgage; property taxes; homeowner’s or renter’s insurance; rent; utilities;
home repairs; home furnishings; housecleaning supplies; housekeeping and laundry services; gardening and
yard supplies; and gardening and yard services.

 Food expenses include food and drink, including alcoholic beverages that are bought in grocery and other
stores. Dining out is not included here.

 Health expenses include 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 expenses include car payments (principal and interest), vehicle insurance, vehicle
maintenance, and gas.

 Clothing expenses include clothing and apparel (including jewelry) as well as personal-care products and
services.

 Entertainment expenses include 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 expenses include 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).

ebri.org Issue Brief • February 2013 • No. 383 12

 Figure 7
Percentage of Households With Household
Incomes Less Than Household Expenditure,
by Age Groups I-III
Age Group I Age Group II Age Group III
(65–74) (75–84) (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
Source: Employee Benefit Research Institute estimates from Health and Retirement
Study (HRS).

Figure 8
Percentage of Age 65+ Households With
Different Degrees of Income Deficit*
Category IV Category V
Category II Category III (Deficit (Deficit Category VI
Category I (Deficit (Deficit =/>10% =/>25% =/>50% (Deficit
(No Deficit) <10%) & <25%) & <50%) & <75%) =/>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
Source: Employee Benefit Research Institute estimates from Health and Retirement Study (HRS).
* Income Deficit = (Income - Expenditure)/Income.

Figure 9
Longitudinal Change in Median Total
Household Wealth and Nonhousing Wealth
(in 2010 $s) for Those 65+ in 2001
Total Wealth Non-Housing Wealth
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
Source: Employee Benefit Research Institute estimates from Health and Retirement
Study (HRS).

Figure 10
Percentage of 65+ Households With
Household Incomes Less Than Household
Expenditures, By Income Quartile
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
Source: Employee Benefit Research Institute estimates from Health and Retirement
Study (HRS).

ebri.org Issue Brief • February 2013 • No. 383 13

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 income
deficits. 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 2001–2009 period, the difference between whites and the
other two races dropped significantly during the same period.

Conclusion
This 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
65–74 and households with members age 85 or above received 54 percent and 66 percent of their total
household incomes, respectively, from this source.

ebri.org Issue Brief • February 2013 • No. 383 14

  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 65–74 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 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.

ebri.org Issue Brief • February 2013 • No. 383 15

 Figure 11
Median Expenditure (in 2010 $s) in Each Spending Category
for 65+ Households, by Income Deficit
No Deficit
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 27,630
2009 9,872 2,763 3,048 2,640 609 1,838 1,117 26,187
Deficit
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
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
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
Source: Employee Benefit Research Institute
estimates from Health and Retirement Study (HRS).

Figure 13
Percentage of 65+ Households
With Household Incomes Less
Than Household Expenditures,
by Single/Couple Status
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
Source: Employee Benefit Research Institute
estimates from Health and Retirement Study (HRS).

Figure 14
Percentage of Age 65+ Households With Household
Income Less Than Household Expenditures, By Race
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
So urce: Emplo yee B enefit Research Institute estimates fro m Health and
Retirement Study (HRS).

ebri.org Issue Brief • February 2013 • No. 383 16

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

ebri.org Issue Brief • February 2013 • No. 383 17

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