Do Retirees Need A ‘Living Wage’ – And What Does That Mean?

Yes, I have been calling for a comprehensive Social Security reform ever since I began writing at this platform. And, yes, that plan calls for a change from the current formula to a flat benefit for all, or, as I’ve also called it, a “basic retirement income.”

The catch, of course, is this: how do you decide what that right income level is?

The federal government gives us a number that seems reasonable enough by its name: the “poverty guideline.” This works out to $12,880 for a single person, or $17,420 for a household of two. True, you’d have to decide whether a household of two gets twice the single person’s benefit or only the two-person-household benefit, and you’d have to decide whether two people cohabitating count as a “single household” or not, but then the hard work of deciding what an “anti-poverty” benefit should be is finished.

Now, there’s a small wrinkle here: the federal government has two different calculations, the “guideline” and the “threshold”: the former is used for benefits eligibilities and the latter for counting how many people live in poverty — and, for what it’s worth, the threshold for an individual over 65 is $1,000 less than someone younger.

But the “poverty guideline” is ultimately just a metric used for other calculations — eligibility for Food Stamps is not “below the poverty line” but “below 130% of the poverty line.” And the calculation itself is based on the rather arbitrary assumption that people spend 1/3 of their income on food, so it’s not a particularly “scientific” measure of the amount of money needed to keep someone out of material deprivation.

But the promise President Biden has made with respect to expanding Social Security is to boost benefits to a minimum of 125% of the poverty level — and, it appears, to do so on an individual basis, so that households-of-two would get what works out to 180% of the poverty level. Is this enough?


Let’s do some more math: the current federal minimum wage is $7.25 per hour, which works out to $15,080 per year, based on a 40 hour week. Biden wants to boost this to $15.00 per hour, or $31,200, because, he says, that’s the level needed to prevent people from living in poverty (see his speech on his spending plan). Is it necessary to keep Social Security benefits in line with the minimum wage?

Lastly, there are (at least) two “Living Wage” calculators that purport to calculate the wage truly needed to cover the “basic needs” of families or a “subsistence living” income level.

The first of these is at MIT. To take some representative numbers:

In Peoria, Illinois, a single adult working 40 hours a week would need a wage of $10.70, or $22,256 per year. Two adults sharing expenses would need a total of $35,734.

In Chicago, those wages/incomes increase to $28.288 and $43,513, respectively.

(The “living wage” climbs even higher for parents; a single adult supporting 3 children would need to earn $39.31 per hour or $81,756 annually, according to their calculations, but that’s not really relevant when it comes to old-age/retirement benefits.)

The second of these was produced at the Economic Policy Institute. It does appear somewhat outdated, using 2017 data, but it produces considerably higher calculations.

Here, in Peoria, they calculate annual expenses of $33,994 for a single adult and $47,785 for a couple.

And in Chicago, they calculate a single adult needs to earn $36,917 and a couple, between the two of them, needs $50,006. Again, the numbers are even higher with children — $101,140 with three children.

But, it turns out, the basis for their calculations is questionable, at best.

According to the MIT documentation, the calculations assume that families prepare all their food at home (no eating out) according to the government’s “low cost food plan.” They calculate average health expenses based on typical premiums for employer health insurance and out-of-pocket costs from national government surveys. For families with children, they assume families elect the lower-cost option between family and center child care (but use average costs for each type).

But they base housing costs on the HUD Fair Market Rent estimates, that is, from HUD data for the 40th percentile rent for “standard quality units.” Why would a family living at a basic, subsistence level, rent an apartment at nearly the average rent for the area? They calculate transportation expenses based on average spending across all consumers, adjusting only to reflect purchasing used rather than new cars. They (appear to) calculate “other” expenses, again, by using average Americans’ spending on such items as clothing or personal care products.

The EPI documentation indicates other ways in which numbers they claim to be “basic expenses” are really just “average survey expenses.” For all metro areas, they assume parents choose daycare centers, despite their higher cost. For transportation, they again use average American transportation spending, adjusting only to reduce vehicle miles travelled assuming less discretionary travelling. For “other” expenses, they again use survey data on actual spending rather than calculating necessary spending, with the primary adjustment being the assumption that families don’t spend any money on “entertainment” or the survey’s “other” category.

In addition, this calculation uses ACA/Obamacare exchanges to calculate health insurance costs but doesn’t take into account the Obamacare premium subsidies. And the tax calculations don’t appear to include Earned Income Tax Credits or Child Tax Credits (though this could be a result of calculating such high costs that the hypothetical family wouldn’t qualify).

Did MIT and EPI intentionally seek to inflate the living wage calculations? It stands to reason that groups advocating for boosts in the minimum wage would construct these calculators in a way to produce results that are invariably higher than minimum wage, but when they produce values that are so much in excess of what is reasonable, they weaken their case instead of strengthening it. After all, consider that the median individual income is $36,000; does it really make sense to say that the majority of Americans are living at a below-subsistence level?

Or is this a result of data limitations? A typical exercise in a high school Personal Finance course is to collect information on food costs, rent costs, and so on, from various sources, and construct a budget on this basis, but that’s not easy to replicate for families nationwide. One also imagines that there’s a certain fear that calculating such a spending budget might be misunderstood as casting moral judgement on the poor.

And, of course, these calculations are all based on spending for working families, not retirees, who are, as a practical matter, likely to spend less on clothing or other discretionary spending, who have the large majority of their medical spending covered by Medicare and the entirety covered by Medicaid for those below federal thresholds.

At the end of the day, this rabbit hole discussion shows that it is by no means easy to figure this question out — neither for those affected by the minimum wage nor for those affected by discussions of what the right level of Social Security benefit is.