Abstract
The United States is in the midst of profound demographic changes. The proportion of the elderly population (65+) in the country is projected to increase from a current 13% of the population to just over 20% of the population by 2030. Considering that the decision regarding living arrangements is of great consequence to the well-being of the elderly and their families, understanding the factors that influence this decision is of great value. In this paper, we exploit the changes in state income tax preferences over time to examine the impact of such tax policies on the living arrangements of the elderly population.
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Notes
The baby boom cohort consists of approximately 76 million children born in the US between 1946 and 1964.
A relevant study by Hoerger et al. (1996) examined the effects of states’ Medicaid subsidies on the three living arrangement outcomes of a disabled elderly: living independently, living in an intergenerational household, and entering a nursing home.
According to Conway and Rork (2008b), North Carolina was the first state to enact an elderly income tax preference by excluding pension income when the personal income tax was adopted in 1901. However, the pension exemption was repealed in 1902. North Carolina later enacted an elderly deduction in 1968 that remains part of the state's personal income tax system today.
The majority of elderly research has utilized either the Panel Study of Income Dynamics (PSID) or the Health and Retirement Study (HRS) data files and there are pros and cons to using each for our study. For instance, the PSID contains less individual-specific information such as health status and income/wealth, but it is available for a much longer period of time (1968-present). In contrast, while the HRS data are individually rich, they are available for a much shorter time period (1992-present) and may be less representative geographically. We opted to utilize the PSID for two reasons. First, since our primary objective is to explore how differences in state-level tax benefits affect living decisions, the PSID allows to identify and track an individual's state of residence much easier and may be more geographically diversified. Second, since there have been relatively few changes to state elderly tax benefits since 1992, the longer sample period afforded by the PSID will enhance our empirical identification.
In 1997, the PSID attempted to correct the under-sampling of the immigration population by adding an immigration sample and adjusting the sample weights. Our analysis does not include the subjects from the 1997 immigration sample.
Examples of an other adult relative include the parent-in-law and the uncle/aunt of the head.
Upon moving out of a family unit, one scenario is for the elderly individual to move into an institution such as a nursing home. While the PSID identifies the individuals who move into institutions (and when the move occurred), the proportion of such observations is very small in our data set (less than 1%). In addition, once an elderly moves into an institution, he/she becomes more likely to drop out of subsequent waves of the survey. Hence in our paper we pool together the elderly individuals who live in institutions with those who live alone (or with spouse).
We choose the random effects model because the fixed effects model requires too many dummy variables, which would reduce the degrees of freedom substantially and potentially lead to inadequate identification.
The estimated coresidence rate is derived by computing the predicted probability of the Logit model. While the estimated regression equation generates the linear prediction of the left-hand-side variable, we apply the appropriate transformation which reflects the Logit assumption that \( Logit\left( {{y_i}} \right) = \ln \left( {\frac{{{y_i}}}{{1 - {y_i}}}} \right) \).
The 1990 U.S. census happens to be the census closest to the implementation of tax preferences in all three states.
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Acknowledgements
The authors are grateful to the participants at the 2010 International Atlantic Economic Society conference in Prague and one referee for several comments that have improved the paper. Any remaining errors are the responsibility of the authors.
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Pan, J., Wagner, G.A. The Effect of State Tax Preferences on the Living Arrangements of Elderly Individuals. Int Adv Econ Res 17, 193–210 (2011). https://doi.org/10.1007/s11294-011-9297-0
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DOI: https://doi.org/10.1007/s11294-011-9297-0