Budget Surgeons Might Harvest Your Clients’ Lifespan

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.

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

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)