If only there was a retirement savings vehicle that could address this problem.
An all-star group of economists and academics, including Peter Orszag, former director of the Office of Management and Budget under President Obama, nutshells the impact that longer lifespans have on Social Security and similar government programs.
“When life expectancy increases for those at the top of the income distribution, they collect additional years of benefits,” the authors report in a new working paper published by the nonpartisan National Bureau of Economic Research. “There is little corresponding increase in taxes paid, except to the extent that having a longer life expectancy may induce people to work longer.”
By contrast, if those at the bottom of the income distribution are not experiencing a similar increase in life expectancy, there is no increase in their total lifetime benefits.
Thus, they explain “the widening gap in life expectancy has the potential to greatly affect the lifetime progressivity of entitlement programs as well as their long-term solvency.”
The group examines this growing gap.
First, they project how life expectancy at older ages is evolving over time by socioeconomic status. Next, they estimate the present value of lifetime benefits by cohort and income quintile. Finally, they estimate the effect of potential reforms to Social Security and Medicare.
The finding?
They confirm that life expectancy at older ages has been rising fastest for the highest socioeconomic groups.
Specifically, for those born in 1930, the gap in life expectancy at age 50 between males in the bottom 20 percent and top 20 percent of lifetime income is 5 years, according to our estimates. Yet for males born 30 years later (in 1960), the projected gap at age 50 between the highest and lowest quintiles widens to almost 13 years.
“Second, we find that there is a growing gap in projected benefits from programs such as Social Security and Medicare. For the 1930 cohort, the present value of lifetime benefits at age 50 is roughly equal for those in the highest and lowest quintile of lifetime income, as those at the top receive more from Social Security while those at the bottom receive more from Disability Insurance, Supplemental Security Income, and Medicaid.”
By contrast, for those born in 1960, there is a $130,000 gap in benefits between the highest and lowest income groups, as those at the top are increasingly likely to receive benefits over longer periods of time, relative to those at the bottom.
Finally, they show that a number of commonly-discussed Social Security reforms would make the program “more progressive, although their impact on progressivity tends to be small compared to the changes arising due to differential changes in life expectancy.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
