The Growing Gap in Life Expectancy by Income Implications for Federal Programs and Policy Responses (2015) / Chapter Skim
Currently Skimming:
5 Policy Responses to an Aging Population
5 Policy Responses to an Aging Population
Pages 101-140
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From page 101... ...
A Congressional Budget Office study, for example, evaluated 30 possible reforms (Congressional Budget Office, 2010) , and an October 2014 update on the website of the Office of the Chief Social Security Actuary considers the impact of 37 long-range Social Security policy provisions.1 Box 5-1 considers the direct indexation of benefit levels to changes in mortality within a population.
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From page 102... ...
by 2 years, to age 64; 2. raising the Social Security normal retirement age (NRA)
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From page 103... ...
There are two mechanisms by which a policy change may translate into an increase or decrease in Social Security and other benefits relative to the baseline scenario. The first channel, which can be characterized as the "mechanical effect," results directly from the policy change, holding behavior constant.
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From page 104... ...
Finally, the policy change(s) for the specific simulation were imposed and the resulting FEM estimates were used to simulate the cohort's new patterns of behaviors and benefits.3 Predicting new patterns of retirement behavior and how retirement decisions might change in response to various policy changes is a challenging modeling exercise.
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From page 105... ...
are progressive if the ratio of benefits in present value to wealth falls as income increases. Based on this definition, a policy change increases progressivity if the net benefitwealth ratio falls more, or rises less, for those in higher lifetime earnings quintiles than for those in lower quintiles.
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From page 106... ...
C. ecause mortality differs between the two experimental scenarios for B each income quintile, one can expect that health and disability may differ between them as well. A person who dies younger and therefore receives Social Security benefits for fewer years would likely also receive more health care benefits during those years and would be more likely to have received disability benefits.
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From page 107... ...
. Their results showed a positive correlation between lifetime earnings (or wealth or education)
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From page 108... ...
, which also has the lowest life expectancy. The increase in expected benefits is just slightly larger in the higher income quintiles that have lon 295 302 260 267 229 234 209 215 191 196 166 169 153 144 147 155 126 127 122 123 1930 baseline 1930 experiment 1960 baseline 1960 experiment Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 FIGURE 5-1 Average lifetime Social Security benefits for males (in thousands of dollars)
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From page 109... ...
The effect of this policy change on total benefits, shown in Figures 5-3 and 5-4, is essentially the same as the effect on Social Security benefits alone. Total benefits increase by $10,000 or less for all quintiles and cohorts as a result of the policy change, with somewhat larger increases in the higher-income quintiles and for the 1960 cohort.
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From page 110... ...
SOURCE: Committee generated using Health and Retirement Study data and cohort R02856 Fig 5-3.eps assumptions. 539 541 480 488 452 454 405 394 410 408 399 417 373 379 373 386 357 376 392 362 1930 baseline 1930 experiment 1960 baseline 1960 experiment Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 FIGURE 5-4 Average lifetime total benefits for females (in thousands of dollars)
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From page 111... ...
If a worker chooses to work longer in response to a policy change, then his or her AIME may rise and this will be reflected in a further change to the Social Security benefits. But our analysis does not focus on the additional earnings that might result from a policy change, even though they may raise the worker's overall well-being.
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From page 112... ...
Absent any change in behavior, the NRA increase functions as a benefit reduction and expected Social Security benefits will fall. Workers may also choose to respond to the policy change by working longer and claiming later; if the actuarial adjustment is more than fair, then doing so will increase benefits, offsetting to some (perhaps small)
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From page 113... ...
; involuntary unemployment for a period near retirement age; physical or mental exhaustion (as distinct from disability) near retirement age; or, occasionally, an especially long period of coverage." Such a policy might, for example, allow people to claim benefits after 45 years of contributions and to receive full benefits (without actuarial adjustment)
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From page 114... ...
R02856 Fig 5-5.eps SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions. 235 208 199 167 175 147 154 142 140 130 125 117 112 119 107 95 100 91 88 75 1930 baseline 1930 cohort 1960 baseline 1960 cohort Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 FIGURE 5-6 Average lifetime Social Security benefits for females (in thousands of dollars)
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From page 115... ...
The bottom line is that this policy change expands the gap in lifetime benefits by quintile of lifetime earnings. Total benefits (i.e., including Medicare, Medicaid, and other programs in addition to Social Security)
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From page 116... ...
SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions. R02856 Fig 5-7.eps 539 523 480 452 438 444 405 394 410 373 387 372 377 373 386 348 357 356 364 333 1930 baseline 1930 cohort 1960 baseline 1960 cohort Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 FIGURE 5-8 Average lifetime total benefits for females (in thousands of dollars)
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From page 117... ...
Unlike the EEA-increase policy in simulation 1, this policy change would generate substantial savings for the Social Security system. Total TABLE 5-2 Impact of Raising the Normal Retirement Age to 70 Present value of net benefits at age 50, relative to wealth, based on the mortality profile for those born in 1960 Under Policy Percentage Point Earnings Quintile Baseline Experiment Change Males Lowest 45.6 40.8 –4.8 2 36.8 31.3 –5.5 3 33.3 27.7 –5.7 4 28.9 23.4 –5.5 Highest 21.4 16.2 –5.2 Females Lowest 65.4 62.3 –3.1 2 54.8 50.8 –4.0 3 44.9 40.2 –4.7 4 33.5 28.6 –4.9 Highest 30.8 25.9 –4.9 SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions.
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From page 118... ...
. 295 260 229 238 209 211 191 181 166 168 144 151 153 126 129 122 119 112 95 92 1930 baseline 1930 cohort 1960 baseline 1960 cohort Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 FIGURE 5-9 Average lifetime Social Security benefits for males (in thousands of dollars)
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From page 119... ...
R02856 Fig 5-10.eps SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions. 499 522 432 451 466 402 402 391 394 375 366 364 347 344 364 353 335 317 309 324 1930 baseline 1930 cohort 1960 baseline 1960 cohort Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 FIGURE 5-11 Average lifetime total benefits for males (in thousands of dollars)
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From page 120... ...
R02856 Fig 5-12.eps SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions. TABLE 5-3 Impact of Raising the Early Entitlement Age to 64 and the Normal Retirement Age to 70 Present value of net benefits at age 50, relative to wealth, based on the mortality profile for those born in 1960 Under Policy Percentage Point Earnings Quintile Baseline Experiment Change Males Lowest 45.6 40.9 –4.8 2 36.8 31.4 –5.5 3 33.3 27.9 –5.5 4 28.9 23.5 –5.3 Highest 21.4 16.3 –5.1 Females Lowest 65.4 62.4 –3.0 2 54.8 50.9 –3.9 3 44.9 40.4 –4.5 4 33.5 28.8 –4.7 Highest 30.8 26.1 –4.7 SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions.
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From page 121... ...
SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions. impact of this change compounds over time, so groups with longer life expectancies would be more affected.
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From page 122... ...
SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions. R02856 Fig 5-14.eps 499 522 491 513 432 427 402 402 399 396 391 366 388 363 347 344 364 344 340 360 1930 baseline 1930 cohort 1960 baseline 1960 cohort Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 FIGURE 5-15 Average lifetime total benefits for males (in thousands of dollars)
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From page 123... ...
SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions. R02856 Fig 5-16.eps TABLE 5-4 Impact of Reducing Real Benefits by 0.2 Percent Annually Present value of net benefits at age 50, relative to wealth, based on the mortality profile for those born in 1960 Under Policy Percentage Point Earnings Quintile Baseline Experiment Change Males Lowest 45.6 45.2 –0.4 2 36.8 36.3 –0.5 3 33.3 32.7 –0.6 4 28.9 28.2 –0.7 Highest 21.4 20.8 –0.6 Females Lowest 65.4 65.1 –0.2 2 54.8 54.4 –0.3 3 44.9 44.5 –0.4 4 33.5 33.1 –0.4 Highest 30.8 30.3 –0.5 SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions.
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From page 124... ...
Thus, this policy change is too modest to offset much of the increase in benefits accruing to higher-income workers in the 1960 cohort as a result of their longer life expectancy. Table 5-5 shows the 295 291 260 258 229 226 209 208 191 190 166 165 153 144 144 152 126 126 122 122 1930 baseline 1930 cohort 1960 baseline 1960 cohort Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 FIGURE 5-17 Average lifetime Social Security benefits for males (in thousands of dollars)
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From page 125... ...
R02856 Fig 5-18.eps SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions. impact relative to wealth; net benefits fall by a slightly larger proportion of wealth for higher earners than lower earners, so the impact is slightly progressive.
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From page 126... ...
R02856 Fig 5-19.eps SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions. 539 538 480 479 452 452 405 394 410 404 393 409 373 372 373 386 357 373 386 356 1930 baseline 1930 cohort 1960 baseline 1960 cohort Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 FIGURE 5-20 Average lifetime total benefits for females (in thousands of dollars)
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From page 127... ...
The most interesting aspect of these figures is how the policy change helps to offset the increase in benefits resulting from rising inequality in life expectancy. For males in the 1930 cohort, total benefits for quintiles 1 and 5 in the baseline scenario are the same, while for the 1960 cohort, benefits in the baseline scenario are $131,000 higher in quintile 5 than quintile 1.
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From page 128... ...
R02856 Fig 5-21.eps SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions. 235 221 208 194 167 157 147 154 146 140 140 134 112 119 108 115 107 104 91 89 1930 baseline 1930 cohort 1960 baseline 1960 cohort Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 FIGURE 5-22 Average lifetime Social Security benefits for females (in thousands of dollars)
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From page 129... ...
R02856 Fig 5-23.eps SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions. 539 535 452 480 466 450 405 394 410 401 386 397 373 363 373 386 357 370 380 349 1930 baseline 1930 cohort 1960 baseline 1960 cohort Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 FIGURE 5-24 Average lifetime total benefits for females (in thousands of dollars)
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From page 130... ...
Medicare were enacted, the age of eligibility was 65 for both programs. Since then, the normal retirement age for Social Security has been increased to 67, whereas the usual Medicare age has remained unchanged.9 Some Medicare beneficiaries, however, qualify for Medicare by virtue of being disabled, rather than at age 65, and they would not be affected by a change in "usual" Medicare eligibility age.10 In addition, were the Medicare eligibility age to change, some 65- and 66-year-olds would become eligible for health insurance subsidies under the new Affordable Care Act11 health exchanges.
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From page 131... ...
In theory, the differential effects on lifetime benefits by earnings quintile could be offset by applying different factors to workers who defer claiming benefits, de pending on their position within the lifetime earnings distribution. For example, one could calculate the adjustment factor by quintile that would keep lifetime benefits constant across claiming age, given the mortality projections for workers in that quintile.
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From page 132... ...
SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions. The results for the committee's simulation of how this policy change would affect lifetime Medicare benefits for males and females are shown in Figures 5-25 and 5-26, respectively.
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From page 133... ...
R02856 Fig 5-26.eps SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions. TABLE 5-7 Impact of Raising the Medicare Eligibility Age to 67 Present value of benefits at age 50, relative to present value of consumption, based on the mortality profile for those born in 1960 Under Policy Percentage Point Earnings Quintile Baseline Experiment Change Males Lowest 45.6 44.2 –1.4 2 36.8 35.7 –1.1 3 33.3 32.5 –0.8 4 28.9 28.2 –0.7 Highest 21.4 20.9 –0.5 Females Lowest 65.4 63.9 –1.5 2 54.8 53.3 –1.5 3 44.9 43.5 –1.4 4 33.5 32.3 –1.2 Highest 30.8 30.1 –0.7 SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions.
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From page 134... ...
NOTE: COLA = cost-of-living adjustment, CPI = consumer price index, EEA = early entitlement age, NRA = normal retirement age. SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions.
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From page 135... ...
ANNEX TO CHAPTER 5: THE COMMITTEE'S RETIREMENT MODEL Predicting when people are going to retire and how those decisions might change in response to various policy changes is a challenging modeling exercise. In this annex the committee provides a nontechnical overview of its approach, explains the merits of this approach compared to alternatives in the retirement literature, and provides some indication of the sensitivity of the results to its choice of approach.
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From page 136... ...
To the extent that 62-year-olds retire at age 62 for reasons other than their proximity to the EEA and NRA, this approach will tend to overstate the change in retirement behavior that will result from this policy change.
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From page 137... ...
There are other ways of assessing whether the committee's approach is likely to generate reliable estimates of the effect of policy change. First, one can explore how well our model's predictions match observed real-world behavior.
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From page 138... ...
SOURCE: Committee generated using Health and Retirement Study data, data from the 1980-2010 March Current Population Surveys, and cohort assumptions. as reported in the CPS.15 Figure 5-28 shows that our models predict a somewhat higher share of the population working at any given age relative to that observed in the CPS (the average difference is about 5 percentage points)
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From page 139... ...
, who found that the increase in NRA from age 65 to 66 led the age of retirement claiming to increase by about half as much. Despite the broad consistency between the results presented here for this specific policy change and other published results, it remains true that the results generated from any model should be treated with caution when assessing the effects of policy changes.
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From page 140... ...
80 70 60 50 Percentage 40 FEM Raise NRA 30 20 10 0 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 Age R02856 Fig 5-30.eps FIGURE 5-30 Percentage of 1930 cohort employed, by age, Future Elderly Model baseline scenario versus raising the normal retirement age to age 70. SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions.
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