The Growing Gap in Life Expectancy by Income Implications for Federal Programs and Policy Responses (2015) / Chapter Skim
Currently Skimming:
4 Implications of Growing Heterogeneity
4 Implications of Growing Heterogeneity
Pages 65-100
The Chapter Skim interface presents what we've algorithmically identified as the most significant single chunk of text within every page in the chapter.
Select key terms on the right to highlight them within pages of the chapter.
From page 65... ...
For most government programs, there is little concern for the question of the present value of benefits. For example, policy makers would not worry about people with a lower life expectancy receiving lower lifetime benefits from national defense or clean air because there is no obvious time dimension: in any given year, people who are alive pay taxes and receive benefits.
|
From page 66... ...
The second central consideration in the philosophy underlying Social Security is the extent to which benefits provide an adequate safety net for individuals in the lower part of the income distribution. This safety net is achieved via a transfer from those with high lifetime income to those with low income.
|
From page 67... ...
The fact that Social Security benefits are paid in the form of an annuity may be taken to be a form of paternalism, in the sense that most well-informed and rational consumers would have chosen to sign up for an annuity anyway. Alternatively one may view Social Security as solving the problem of adverse selection in the annuity market.3 The distinction between ex post and ex ante inequity can be used to think about the effect of differences in life expectancy among groups on Social Security payouts.
|
From page 68... ...
To show the interaction of changing life expectancy with considerations of equitable rates of return and adequacy of benefits for lower-income individuals, the committee uses a very simple, stylized model. To match the analysis of data elsewhere in this report, we switch our focus from rates of return to the present value of net benefits received by different groups.
|
From page 69... ...
In the simplest case, life expectancy rises for the high income but remains constant for the low income. The initial effect of this change, holding the benefits formula constant, would be to shift upward the curve representing the present value of benefits received by the high income without affecting the present value of benefits received by the low income (see Figure 4-2)
|
From page 70... ...
Specifically, projected net benefits would fall from $319,000 to $310,000. By contrast, for males in the top quintile of lifetime earnings, the present value of projected net benefits would rise from $189,000 to $306,000.
|
From page 71... ...
Given that the current system reflects a balancing of concern with equity in rates of return with adequacy of income for people with low income, one can see that the change in mortality in the absence of a change in the benefit formula moves the system in the direction of more equity and less adequacy -- that is, in the direction of making it less redistributive. This can be seen in Figure 4-3, where the net result of changing longevity and the adjustment of Social Security NRA is that the present discounted value of benefits has risen for the high income and fallen for the low income and that the gap between these present values has increased.
|
From page 72... ...
A second consideration is the effects of differential mortality on the incentives for Social Security benefit claiming. Social Security beneficiaries can choose to claim benefits earlier or later than the NRA, but the
|
From page 73... ...
Differential mortality in relation to lifetime earnings thus does two things. Relative to a situation in which the low and high income have the same life expectancy, differential mortality lowers lifetime benefits for lower earners.
|
From page 74... ...
THE DISTRIBUTION OF SOCIAL SECURITY BENEFITS The preceding discussion of conceptual issues surrounding the progressivity of Social Security under differential mortality abstracts from many details of how the program operates. In this section, the committee provides some additional background information on the Social Security program that is necessary for our subsequent discussion and reviews the empirical literature on the distributional effects of Social Security before turning to new estimates based on the FEM.
|
From page 75... ...
The replacement rate is usually defined as the monthly benefit amount divided by pre-retirement average monthly career earnings.10 The Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (2013) reported that the replacement rate for a worker who consistently earns the national average wage over his or 8 Whether the reduction factor is, in fact, actuarially fair for a typical worker is a matter of some dispute.
|
From page 76... ...
As with the replacement rate, one might compare the money's worth measures for people at different points in the income distribution to assess progressivity.13 An alternative approach, employed by Coronado and colleagues (2011) , is to calculate the Gini coefficient, a measure of income inequality within a population, before and after Social Security benefits and taxes, to see if Social Security reduces (or increases)
|
From page 77... ...
The IRR was 2.70 percent for the lowest AIME quintile in his cohort, 1.32 for the middle quintile, and 0.85 for the top quintile. With a 3 percent discount rate, all quintiles experience a negative net transfer, but the lowest AIME quintile loses $22,103 or 3.3 percent of earnings, versus $196,230 or 7.9 percent of earnings for the top quintile.
|
From page 78... ...
In the Meyerson and Sabelhaus analysis, the overall Old-Age, Survivors, and Disability Insurance system is strongly progressive, with workers in the lowest quintile of household lifetime earnings having a benefit-tax ratio of 1.65 versus 0.65 for workers in the top quintile (for a sample of workers born in the 1960s, using a 3 percent discount rate and incorporating differential mortality)
|
From page 79... ...
Although decisions such as the choice of earnings measure are always important, they are arguably less critical in this case, given that our goal is not to estimate the money's worth of Social Security per se but rather to assess how the distribution of Social Security benefits is changing over time in light of unequal longevity increases. The experiment that the committee performs is based on the program rules as of 2010 and compares outcomes for two hypothetical mortality and health regimes.
|
From page 80... ...
Given this setup, we calculate the present value of lifetime benefits received by each lifetime earnings quintile in each generation; for the 1960 cohort, this calculation is entirely based on projected net benefits. Later in this chapter, we also include taxes paid after age 50 to compute overall net benefit profiles from Social Security and other programs combined.
|
From page 81... ...
. The additional 6 to 8 years of life expectancy for the top three quintiles leads to large increases in their expected lifetime Social Security benefits, as seen in Figure 4-5, with projected benefits for the top quintile in 1960 reaching $295,000.
|
From page 82... ...
top quintile relative to the bottom quintile of $48,000 is smaller than for males. But the overall message is the same for females as for males: diverging life expectancy is making Social Security benefits vary more by earnings quintile over time.
|
From page 83... ...
9 9 8 8 5 5 3 3 2 2 1930 cohort 1960 cohort Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 FIGURE 4-8 Average lifetime Disability Insurance benefits for females (in thou R02856 Fig 4-8.eps sands of dollars)
|
From page 84... ...
Finally, the results for SSI benefits are shown in Figures 4-9 and 4-10. As with DI, SSI benefits are larger for the lower quintiles because of their 11 11 4 4 1 2 1 1 1 1930 cohort 1960 cohort Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 FIGURE 4-9 Average lifetime Supplemental Security Income benefits for males (in thousands of dollars)
|
From page 85... ...
Second, Medicare supplementary medical insurance is financed by general revenues, which consist mostly of income taxes collected through a progressive income tax structure. Finally, whereas the Social Security benefit increases as lifetime earnings increase, Medicare offers essentially the same benefit package to 15 Other than for high-income enrollees, the premiums for Medicare Part B (which covers physician, outpatient hospital, and some home health services)
|
From page 86... ...
However, the committee's view is that people who expect to use Medicare benefits more -- those in poorer health, for example -- would place greater value on it. For the purposes of this report, we take the simple approach and value Medicare expenditures by lifetime income at their actual cost.
|
From page 87... ...
The findings from the FEM are unambiguous: those with lower lifetime income have higher annual Medicare expenditures. For example, for 67-year-old males, the Medicare expenditures in the lowest income quintile are 48 percent higher than in the top quintile; for females at this age, the ratio is 69 percent.
|
From page 88... ...
24 22 20 18 16 14 12 11 10 8 Age 67 Age 77 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 FIGURE 4-12 Average annual Medicare spending for females born in 1930, by income quintile. R02856 Fig 4-12.eps SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions.
|
From page 89... ...
For the 1930 cohort, lifetime Medicare benefits are relatively flat by earnings quintile: males in the lowest quintile can expect to receive, on average, $162,000 in lifetime Medicare benefits, only 6 percent more than those in the top quintile. Thus, for the 1930 cohort of males, the higher annual Medicare expenditure of those in the lower-income quintiles is roughly offset by their shorter life expectancy.
|
From page 90... ...
For example, those in the bottom income quintile can expect to receive $158,000 in lifetime Medicare benefits, just 78 percent of the lifetime benefits for those in the top quintile.20 The results for females, shown in Figure 4-14, are somewhat different, reflecting both the distribution of annual Medicare benefits and the smaller disparities in life expectancy for females in the 1930 cohort. Females in the lowest quintile receive about 30 percent more in lifetime Medicare benefits than those in the top quintile.
|
From page 91... ...
report that the median age of first entry into a nursing home is about 83 years old) and the longer life expectancy of those with higher lifetime income, the lifetime impact of the Medicaid benefit is worth examining.
|
From page 92... ...
For example, for males of the 1930 birth cohort, the present value of Medicaid from age 50 on is $77,000 for those in the lowest earning quintile, $35,000 77 75 35 37 21 27 21 11 16 15 1930 cohort 1960 cohort Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 FIGURE 4-15 Average lifetime Medicaid benefits for males (in thousands of dollars)
|
From page 93... ...
THE DISTRIBUTION OF TOTAL NET BENEFITS FROM MEDICARE, MEDICAID, SOCIAL SECURITY, AND SUPPLEMENTAL SECURITY INCOME In this section, the committee combines the present value of total benefits, by lifetime earnings quintile, from Medicare, Medicaid, Social Security (including retirement and disability) , and Supplemental Security Income and then subtracts taxes paid after age 50 (including personal income taxes, personal payroll taxes on wages, and employer payroll taxes)
|
From page 94... ...
487 402 341 310 296 310 290 251 240 236 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 1930 1960 FIGURE 4-18 Average lifetime total net benefits for females (present value in thousands of dollars) , by lifetime earnings quintile.
|
From page 95... ...
SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions. 539 480 452 405 394 410 386 373 373 357 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 1930 cohort 1960 cohort FIGURE 4-20 Average lifetime total benefits for females (present value in thou R02856 Fig 4-20.eps sands of dollars)
|
From page 96... ...
For both males and females, three features of the progressivity measures are noteworthy. First, these government programs represent a substantial share of inclusive wealth at age 50; net benefits amount to greater than half of inclusive 213 217 162 167 131 127 101 100 82 80 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 1930 1960 FIGURE 4-21 Average lifetime total taxes paid for males (present value in thou R02856 Fig 4-21.eps sands of dollars)
|
From page 97... ...
0.46 0.46 0.37 0.35 0.33 0.29 0.27 0.21 0.20 0.14 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 1930 1960 FIGURE 4-23 Total net benefits as share of inclusive wealth as of age 50 for males. R02856 Fig 4-23.eps SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions.
|
From page 98... ...
Second, for both the 1930 and the 1960 cohorts, net benefits are a larger share of inclusive wealth for lower earners than higher earners, suggesting that at least on this measure, the government programs as a whole are progressive for both cohorts. Third, our focus is mostly on the change in progressivity, not its level.
|
From page 99... ...
of total lifetime benefits between top and bottom income quintiles, for three mortality regimes: 1930 R02856 Fig 4-25.eps cohort, half dispersion, and 1960 cohort. SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions.
|
From page 100... ...
SOURCE: Committee generated using Health and Retirement Study data and cohort assumptions. tality regimes of 1930, half dispersion, and 1960.
|
Key Terms
This material may be derived from roughly machine-read images, and so is provided only to facilitate research.
More
information on Chapter Skim is available.