THE EFFECT OF OLD AGE ASSISTANCE ON RETIREMENT: OLD AGE ASSISTANCE

This section describes OAA benefits and recipiency rates and then discusses the available administrative data on OAA. By 1934, twenty-seven states had instituted assistance for the elderly, offering average annual benefits of $174 to 235,000 recipients.14 The federal government took up the reins of welfare provision with the Social Security Act of 1935. Besides establishing Social Security, it mandated that each state initiate aid for the needy elderly, dependent children, and blind. By 1940, every state had set up an Old Age Assistance program. The federal government matched state benefits of up to $40 per recipient per month with an additional 50% contribution.
OAA grew rapidly, as Table 1 shows. By 1940 fully 21.8% of the population 65 and over, 2 million individuals, were receiving OAA. The average nationwide benefit in 1940 was $241, or $737 in 1990 terms. OAA benefits were quite generous relative to 1940 per capita income of $595. Benefit levels varied considerably across states, ranging from $91 in Arkansas to $455 in California, with a standard deviation of $92. Recipiency rates ranged from 8.1% in Washington DC and 11.2% in New Jersey to 50.2% in Oklahoma, with a standard deviation of 7.9%. TABLE 1

National average Standard deviation across states
1940
Annual benefit $241 $92
Recipiency rate 21.8% 7.9%
1950
Annual benefit, 1940 dollars $289 $93
Increase from 1940 19.7% 27.0%
Recipiency rate 22.7% 13.4%

In 1950, the national average benefit had risen 19.7% to $289 in 1940 dollars. Most of the increases occurred shortly after the federal government raised the matching rate in 1946 to 75% for the first $20 per month from the state and 50% for the next $30. The correlation between the change in benefit and the 1940 level was -0.50, so states with relatively low 1940 benefits, such as Texas and Florida, generally raised benefits the most. The rate of benefit growth varied considerably across states, with a standard deviation of 27.0% – which is key for the econometric analysis in this paper. The change in benefit levels within a state between 1940 and 1950, as it is correlated with the change in labor force participation, will be used to determine the effect of OAA on labor supply. TABLE 2 The Impact of Benefits on Recipiency_

Log annual OAA benefit 0.170
(0.071)
State manufacturing value added per capita ($1,000) -0.323
(0.187)
State average farm value ($1,000) -0.009
(0.005)
Log state per capita income 0.100
(0.103)
State unemployment rate 1.68
(0.63)
Adjusted R2 0.752

Recipiency should rise with benefits if benefits are to affect labor supply. In Table 2 state level recipiency rates are regressed on log benefits, state and year fixed effects, and measures of economic activity. Benefit changes within states during the decade had a significant positive impact on recipiency rates, with a 10% rise in benefits leading to almost a two percentage point increase in recipiency. At the same time, growing economic prosperity – rising manufacturing value added and farm values and declining unemployment rates – led to declines in OAA.