How the Life-Expectancy Gap for Rich and Poor Skews Social Security

A new study from the GAO shows the dramatic effect of diverging life spans on lifetime benefits

By Josh Zumbrun

 To show the effect of changing U.S. life expectancy, the GAO studied the benefits that men earning $20,000 or $80,000 could expect to receive from the Social Security system over the course of their lives.

To show the effect of changing U.S. life expectancy, the GAO studied the benefits that men earning $20,000 or $80,000 could expect to receive from the Social Security system over the course of their lives. Photo: Bradley C. Bower/Associated Press
 

A growing body of research in recent years points to the striking fact that wealthier people are living significantly longer than less wealthy people, and the gap appears to be widening. Just this week, a study led by Stanford University economist Raj Chetty, showed that life expectancy differed for the top 1% and bottom 1% of the income distribution by 15 years for men and by 10 years for women.

Now, a new study from the Government Accountability Office shows the dramatic effect this is having on Social Security. To show the effect of changing U.S. life expectancy, the GAO studied the benefits that men earning $20,000 or $80,000 could expect to receive from the Social Security system over the course of their lives.

Typically, such benefits would be calculated based on the average life expectancy for U.S. men., but GAO calculated the benefits by looking at the life expectancy that’s actually typical for men at different income levels.



An income of $20,000 is roughly the 25th percentile. At age 62, the average U.S. man will live another 21 years. The benefits he would expect to earn over the rest of his life would be about $156,000. But as the research of Mr. Chetty and others has shown, the average man at this income range won’t live quite that long. Based on the average life expectancy of low-income men, they should expect to collect only $138,000 from Social Security.

Waiting to retire still improves Social Security’s payout, on average. Retiring at age 70 would result in $214,400 in benefits with an average life span, but only $184,800 given the typical life span.




This same effect works in reverse for men earning $80,000 a year—roughly the 75th percentile.

These men could expect to earn about $355,000 from Social Security if they retired at age 62, and had the average U.S. man’s life. But men with this level of income tend to live longer, and once this is accounted for, they should actually expect to receive about $411,000.Because higher-income men generally live longer into their 70s and 80s, they benefit even more from waiting to retire. If a man with the average life expectancy waits until age 70, he would earn $504,000. But taking into account a more realistic life expectancy, a higher-income man would actually be likely to collect around $595,000.

The GAO report looked only at men because the effect of income on men’s life expectancy is much clearer than it is for women, who generally live longer. Other research—such as from Barry Bosworth of the Brookings Institution—suggests that this same general link between income and life-expectancy also applies to women.

The fact that higher-income men receive more than would be expected from Social Security and lower-income receive less suggests that the program is gradually becoming less progressive.

(The request for the GAO to study this topic came from the Senate office of Bernie Sanders, although the conclusions and numbers are the GAO’s own.)Combining the two charts above shows how the Social Security system is changing:



A growing share of the benefits are going to men with higher incomes and a shrinking share to those with lower incomes.

An important caveat: Social Security is designed so that people who pay more into the system receive more in benefits. After accounting for the differences in life expectancy, higher-income men who retire at 62 will receive five times their annual income from the system, whereas lower-income men will receive seven times their annual income. At age 70, higher-income men receive seven times their annual income, compared with nine times for lower-income men. In this sense, the GAO notes, the system is still progressive. Just increasingly less so. Another caveat: Social Security benefits eventually max out entirely. Millionaires can’t earn multiples of their income from the system.

The GAO report contains no recommendations for policy. It only seeks to document the implications of income inequality and changing life expectancy on Social Security benefits. Regardless of one’s political beliefs about the system, it’s not paying benefits the way it used to.

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