How the Growing Gap in Life Expectancy May Affect Retirement Benefits and Reforms (original) (raw)

Policy Brief No. 21 - An Increasing Age at Retirement May Amplify Socioeconomic Inequalities

2015

Population ageing raises questions about the sustainability of the public pillars of the retirement income system and about inter-generational equity. In response to this, a number of countries have raised the normal retirement age in an attempt to reduce projected future expenditures on their state pension system. In this context, private savings and later retirement represent the best ways of avoiding a major fall in living standards when retiring. Increased life expectancy at age 65 appears to justify this policy trend. But there are substantial differences in life expectancy and healthy life expectancy between people of different socio-economic status, and these seem to be widening. There is a danger that in the name of inter-generational equity, we will in fact be moving towards increased social inequality among the pensioners of the future.

Changing Mortality Rates and Income Inequality among the U.S. Elderly

RePEc: Research Papers in Economics, 2014

TWO TRENDS HAVE INCREASED disparities in well-being among aged and near-aged Americans. First, money income inequality has increased over time. Among members of families headed by a person age 62 or older, inequality as measured by the Gini coefficient has increased 11 percent since 1979. This increase has been driven by some of the same factors that have pushed up inequality among the nonelderly. These include growing gaps in labor incomes and increased concentration of capital income. Second, life spans have become more unequal. A venerable literature has established that there are significant differences in life expectancy between people with high and low socioeconomic status as measured by such indicators as income and educational attainment. New studies also suggest that the differential has widened in the United States over the past three decades, reversing an earlier trend toward greater equality. A few studies even suggest that much of the recent increase in expected life spans is concentrated among those with above-average incomes, and that life expectancy may be roughly constant or even declining for Americans with lower status. Trends in differential mortality uncovered in recent research raise profound questions about the equity of old-age pension formulas. The Social Security retirement-worker pension provides a basic benefit at the normal retirement age, known as the Primary Insurance Amount or PIA. The formula for this pension is highly redistributive. It provides a more generous replacement rate for low-lifetime-wage workers than for workers with high average earnings. This kind of redistribution may be necessary to compensate low-wage workers for their shorter expected life spans. Retired workers' actual Social Security benefits are determined by (a) their PIA, and (b) the actuarial factors used to adjust the monthly pension to reflect early or late benefit claiming. Workers who claim benefits at the earliest entitlement age, 62, receive reduced benefits; workers who delay claiming benefits until the latest claiming age, 70, receive monthly 1 I gratefully acknowledge the crucial research contributions of my colleagues Barry Bosworth, Mattan Alalouf, and Kan Zhang, all of whom played critical roles in creating and analyzing the research files. I also gratefully acknowledge the generous research support provided by the Sloan Foundation.

Healthy life expectancy: Estimates and implications for Retirement Age Policy

The simultaneous growth in longevity and mounting budget deficits in the U.S. have increased interest in raising the age of eligibility for public health and retirement benefits. The consequences of this policy depend on the health of the near elderly, and on the distribution of health by demographic group. We first describe healthy life expectancy at age 62 by sex, race, and education. Healthy life expectancy varies widely within and across gender and race groups, with the best-off groups enjoying nearly 4 more years of healthy life than less well-off groups. We then simulate the capacity to work of near elderly individuals (62-64 year-olds) based on the work, disability, and retirement status of 57-61 year-olds reporting the same level of health. Our estimates indicate that work capacity is substantial. The health status of 62-64 year-olds suggests their labor force participation could rise by over 15 percentage points without access to early Social Security retirement benefits, while disability rates would increase modestly, by 3 percentage points. Still, less advantaged groups such as those without any college education, would experience a rise in disability rates that is twice as large, indicating the uneven burden of changes in the age of eligibility.

Retirement Security: Shorter Life Expectancy Reduces Projected Lifetime Benefits for Lower Earners

SIRN: Adequacy of Benefits/Retirement Income (Sub-Topic), 2016

The increase in average life expectancy for older adults in the United States contributes to challenges for retirement planning by the government, employers, and individuals. Social Security retirement benefits and traditional defined benefit (DB) pension plans, both key sources of retirement income that promise lifetime benefits, are now required to make payments to retirees for an increasing number of years. This development, among others, has prompted a wide range of possible actions to help curb the rising future liabilities for the federal government and DB sponsors. For example, to address financial challenges for the Social Security program, various options have been proposed, such as adjusting tax contributions, retirement age, and benefit amounts. Individuals also face challenges resulting from increases in life expectancy because they must save more to provide for the possibility of a longer retirement.Life expectancy varies substantially across different groups with signi...

Retirement and Social Security Reform Expectations: A Solution to the New Early Retirement Puzzle Ü

RePEc: Research Papers in Economics, 2007

Despite the persistent increase in life expectancy, combined with an increasing penalty for earlier benefit take-up under the Old Age Benefits Program of Social Security, people continue to claim benefits before the Normal Retirement Age (NRA) in record numbers. Furthermore, almost 60% of Americans claim at the earliest possible age. We solve and simulate a realistic, and empirically based dynamic life-cycle model of labor supply and benefit claiming, that accounts for the rich set of incentives affecting Older Americans. We model, among other sources of uncertainty, the uncertainty surrounding future benefit amounts, which can be rationalized by the perception of the need for reforms to the system. Using aggregate and individual level information on expected benefit cuts and probabilities of realizing them, this framework is one of the first to explain the large proportion of individuals claiming benefits early. Moreover, our model is the first to predict, consistent with the data, that even if the penalties for claiming benefits early increase (like with the ongoing increases in the NRA) the percentage of individuals claiming early might not necessarily decline.

The effect of social security, health, demography and technology on retirement

Review of Economic Dynamics, 2013

This article studies the determinants of the labor force participation of the elderly and investigates the factors that may account for the increase in retirement in the second half of the last century. We develop a life-cycle general equilibrium model with endogenous retirement that embeds Social Security legislation and Medicare. Individuals are ex ante heterogeneous with respect to their preferences for leisure and face uncertainty about labor productivity, health status and out-of-pocket medical expenses. The model is calibrated to the U.S. economy in 2000 and is able to reproduce very closely the retirement behavior of the American population. It reproduces the peaks in the distribution of Social Security applications at ages 62 and 65 and the observed facts that low earners and unhealthy individuals retire earlier. It also matches very closely the increase in retirement from 1950 to 2000. Changes in Social Security policy -which became much more generous -and the introduction of Medicare account for most of the expansion of retirement. In contrast, the isolated impact of the increase in longevity was a delaying of retirement.

Population aging and legal retirement age

Journal of Population Economics, 2006

This paper analyzes the effects of population aging on the preferred legal retirement age. What is revealed is the crucial role that the indirect 'macro' effects resulting from a change in the legal retirement age play in the optimal decision. Two Social Security systems are studied. Under a defined contribution scheme aging lowers the preferred * All correspondence to Francisco Lagos. The authors thank Ignacio Ortuño, Slomo Weber, Francisco Marhuenda, Georges Casamatta, and two anonymous referees for comments on a previous version of this paper. 1 legal retirement age. However, under a defined pension scheme the retirement age is delayed. This result shows the relevance of correctly choosing the parameter affected by the dependency ratio in the design of the Social Security programme.