[Excerpt] The population of the United States is growing older. Because of the aging of the population and the decline in income that occurs when people retire, both the amount and the composition of spending by American households could change substantially as the 76 million members of the baby boom generation reach retirement age. This CRS report presents data on spending by Americans aged 55 and older collected by the U.S. Department of Labor through its Consumer Expenditure Survey (CES). From 1985 to 2005, the average annual expenditures of older Americans rose along with their incomes, and the distribution of spending among expenditure categories changed. These changes were the result of changing tastes and preferences among consumers and differences in the rates of price increase among various classes of goods and services.
Between 1985 and 2005, the average annual expenditures of families headed by persons between the ages of 55 and 64, adjusted for inflation, rose by 7.5%. Spending on housing rose by 29.6%, and expenditures on health care rose by 39%. The average annual expenditures of families headed by persons between the ages of 65 and 74 rose by 15.7%. Their average housing expenditures rose by 22.5%, while their spending on health care rose by 40%. The average annual expenditures of families headed by persons aged 75 and over rose by 13.3%. Average housing expenditures among this age group rose by 20.4%, while their spending on health care rose by 40%. As a result, by 2005 housing and health care comprised a larger share of total expenditures among Americans 55 and older than they did in 1985.
Much of the increase in health care spending was due to the rapid rise in the price of medical goods and services. Between 1985 and 2005, the Consumer Price Index (CPI) for medical care rose by 185%, while the CPI for all goods and services rose by 82%. Health care expenditures rose not only because of inflation but also because of the introduction of new medicines, medical equipment, and procedures that either replaced older treatments or that represented entirely new forms of medical care. The increase in health care expenditures was concentrated in two categories: health insurance premiums and out-of-pocket spending for prescription drugs, both of which rose substantially between 1985 and 2005. Out-of-pocket spending for medical services and supplies, on the other hand, fell during the period. The increase in housing expenditures cannot be attributed to inflation, at least as it is measured by the Consumer Price Index. Between 1985 and 2005, both the CPI for housing and the CPI for all goods and services rose by 82%. The CPI may understate the growth in the cost of housing because it includes rising rents but not rising home prices.
If Americans merely choose to buy more health care and more housing, then there is no obvious role for public policy to influence that choice. However, to the extent that other forms of spending are "squeezed out" by increases in the cost of housing and health care that are caused by market inefficiencies or the unintended consequences of federal tax laws, then intervention to correct the market failures and a review of the incentives caused by these tax policies may be warranted.
This report will be updated as new data become available.