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Budget Surgeons Might Harvest Your Clients’ Lifespan

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Many economists say they see a growing gap in life expectancy between high-income U.S. residents and low-income U.S. residents.

(Related: Stress May Be Widening the U.S. Longevity Gap)

Some are starting to talk about the possibility of changing Social Security, Medicare and other government retirement benefits programs to adjust for that gap.

Those economists hope a life expectancy gap adjustment can ease the programs’ funding problems. They hope to extract some of the benefits cash now going to higher-income people and transplant it into the wallets of lower-income people with shorter life expectancies.

A group of 13 economists has published a working paper about that idea, “How the Growing Gap in Life Expectancy May Affect Retirement Benefits and Reforms,” on the website of the National Bureau of Economic Research, behind a paywall.

The group includes Peter Orszag, an investment banker at Lazard who served as director of the White House Office of Management and Budget from January 2009 through June 2010, under former President Barack Obama.

The group also includes several economists from the University of California, Berkeley; the University of Southern California; and the Brookings Institution.

For insurance agents and financial advisors, one reason to pay attention to this issue is that, from the perspective of an economist interested in performing budget surgery on government retirement programs, your typical client is probably a high-income individual with a long life expectancy. Any program changes based on adjustments for a life expectancy gap could eat into the total value of your clients’ Social Security or Medicare benefits.

Public program reformers’ thinking about life expectancy could also influence how managers of commercial longevity-related insurance programs, such as annuity programs or long-term care insurance programs, think about managing their exposure to longevity risk.

Here’s a look at what some of the economists say in the paper.

Measuring tape (Image: Thinkstock)

1. Higher-income U.S. residents seem to be hogging longevity gains.

Some economists question how big the longevity gap really is, or how long any gap that does exist will last. The authors of one recent study found, for example, that the gap in life expectancy between the rich and poor at birth is narrowing rapidly.

(Related: The Longevity Gap: A Study in Contrasts)

The authors of the new NBER paper present data suggesting that life expectancy inequality for 50-year-old U.S. men increased dramatically between 1930 and 1960.

The authors divided life expectancy data for 50-year-old men into five categories, or “quintiles,” based on income.

The authors found that, in 2010, the 50-year-old men in the top income quintile could expect to live 38.8 more years, to 88.8 years. In 1980, 50-year-old men could expect to live just 31.7 more years.

Life expectancy moved in the other direction for 50-year-old men in the bottom income quintile.

Their life expectancy dropped to 26.1 more years of life in 2010, from 26.6 years in 1980.

Here’s how life expectancy changed for the 50-year-old men in the other quintiles:

  • Lower Middle Quintile: From 27.2 years to 28.3 years

  • Middle Quintile: From 28.1 years to 33.4 years

  • Upper Middle Quintile: From 29.8 years to 37.8 years

Clock (Image: Thinkstock)

2. Living longer boosts the amount of time the higher-income people have to collect Social Security and receive care covered by Medicare.

The authors of the new NBER paper found that the low-income men who were 50 in 1980 were on track to collect large amounts of benefits aimed at poor people and people with disabilities over the course of their relatively short lives. This tended to compensate for the limited amount of time they would collect Social Security benefits and receive care covered by Medicare.

(Related: Life Expectancy Holds Steady, but Not for 95-Year-Olds)

By 2010, the growing life expectancy gap widened the gap between the haves and the have-nots.

In 1980, for example, the inflation-adjusted present value of government entitlement program benefits for the 50-year-old men in the bottom income quintile was $402,000. The inflation-adjusted present value of entitlement program benefits for the 50-year-old men in the top income quintile was also $402,000.

In 2010, the inflation-adjusted present value of benefits from the same programs was $391,000 for people in the bottom income quintile, and $522,000 for people in the top income quintile.

IRS Headquarters (Photo: Allison Bell/TA)

3. Adjusting the longevity effect for taxes changes the gap but does not eliminate it.

The authors of the NBER paper acknowledged that higher-income people pay more taxes.

(Related: 5 Ways to Use the New US Life Tables)

They adjusted the tables showing the present value of entitlement program benefits for 50-year-old men by subtracting the value of taxes paid after age 50 from the benefits totals.

The tax adjustment changed the nature of the gap, but it still left a gap.

In 1980, the tax-adjusted present value of entitlement benefits for 50-year-old men was $319,000 for those in the bottom quintile, $202,000 for those in the upper middle quintile, and $189,000 for those in the top quintile.

In 2010, the comparable tax-adjusted present values were $310,000 for the 50-year-old men in the bottom quintile, $266,000 for the lower middle quintile, $301,000 for the middle quintile, and $331,000 for the men in the upper middle quintile, and $306,000 for the men in the top quintile.

The men in the upper middle quintile were on track to collect $65,000 more in benefits than the men in the lower middle quintile. 

Ebola (Image: Thinkstock)

4. The economists who developed the latest study assume high-income people’s longevity is baked in.

For high-income people who may face Social Security or Medicare benefits changes as a result of adjustments related to life expectancy, one limitation of the NBER study may be that the authors assume, as a given, that higher-income people have and will continue to have a longer life expectancy than lower-income people.

(Related: What Are Taxes on a Lump Sum Payout of an Annuity?)

The economists do not allow for the possibility that changes in health care or living conditions could narrow the gap, and they do not discuss the reality that some high-income people have known medical conditions that reduce their life expectancy.

Social Security card (Photo: Thinkstock) 

5. The economists give several examples of ways to cut Social Security in ways that would favor low-income people with shorter life expectancies over high-income people with longer life expectancies.

The authors of the paper include a table on the last page that shows how an adjustment for the life expectancy shift that occurred between 1980 and 2010 might interact with six different types of proposals for cutting government retirement entitlement program spending.

Raising the Medicare eligibility age to 67, for example, would have a much bigger effect on the total value of entitlement program benefits for 50-year-old men in the bottom income quintile than for those in the top quintile. That move could cut the value 1.4% for the men in the bottom quintile, and just 0.5% for those in the top quintile, according to the table.

A change in the way Social Security calculates benefits for higher-income recipients could cut total entitlement benefits value 1.1% for the men in the bottom quintile and 3.4% for the men in the top quintile, according to the table. 

— Read Join the 1% and live a decade longer on ThinkAdvisor.


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