Longevity Policy: Facing Up to Longevity Issues Affecting Social Security, Pensions, and Older Workers

5 - Longevity Insurance Benefits

87 5 Longevity Insurance Benefits With increased longevity, retirees face an increased risk of having insufficient resources to maintain their standard of living at older ages. While Social Security provides a guaranteed lifetime benefit, that benefit is insufficient for most retirees to maintain their preretirement standard of living. Thus, most people need to supplement their Social Security benefits with other sources of income. While the causes of old-age poverty are complex, one factor is that as people grow older, especially if they live longer than they expected to, they risk exhausting their sources of income other than Social Security. People in their eighties with low Social Security benefits are particularly economically vulnerable. Few are able to compensate for a loss of non–Social Security income by working. People in this age group, often called the old-old, may not have sufficient resources to enjoy the last years of their lives without financial worries. This chapter proposes a new type of Social Security benefit, called longevity insurance, which may be particularly useful for this vulnerable group. This proposed benefit strengthens social insurance for people in their eighties and older by adding longevity insurance to the social insurance protection Social Security provides. Longevity insurance is a deferred annuity that starts at an advanced age. Much of the utility value to workers of annuitization is provided by this benefit because the annuity value comes from insuring against the possibility of running resources down to a very low level if one lives to be older than expected (Brown 2001). The benefit would be supplied through Social Security and would be universally available, but with eligibility based on a benefits test, so that only people with low Social Security benefits would receive it. The longevity insurance benefit proposed here is an enhanced Social Security benefit starting at age 82, which is roughly the life expectancy of someone retiring at age 62. Qualifying persons receiving a Social Security benefit below a minimum level would have their benefit raised at that age. 88 Turner Longevity insurance can be an important component of a policy package to restore Social Security solvency. Public policy changes to restore solvency likely will reduce the generosity of Social Security old-age benefits as part of a package of changes. Most reform packages that cut benefits would raise elderly poverty. To offset that effect, policymakers may want to increase the generosity of some benefits to better target benefits to vulnerable groups. That goal could be achieved by providing longevity insurance benefits. This insurance shifts Social Security resources toward persons who both are old and have low incomes , and thus provides better targeting of limited resources in terms of the protection provided to vulnerable persons. AN INCREASING RISK OF POVERTY WITH ADVANCING AGE Poverty rates among older persons increase with age. Elderly poverty is especially high among people aged 80 and older—a third higher than for people aged 65–69 (Whitman and Purcell 2006). Poverty is particularly a problem for older women (Smith 2003). Women aged 80 and older had a poverty rate of 14 percent in 2004, and 25 percent had income below 125 percent of the poverty line, compared to 10 percent and 13 percent for women aged 55 to 61 (Social Security Administration 2006). A reason for the increase in poverty at older ages is a decline in the importance of non–Social Security sources of retirement income at older ages. Official poverty statistics understate the problem of poverty in this age group because they no longer represent the minimum needs of older persons. They are based on a methodology established in 1964. For that reason, 125 percent of poverty is often used as a better measure of persons with insufficient resources (Butrica and Zedlewski 2008). However, even that figure understates the percentage of older women who have fallen into poverty. If no one fell into poverty as they aged, poverty rates would decline at older ages because of the greater mortality risk of low-income persons as compared to high-income persons. Longevity Insurance Benefits 89 Risks Leading to Poverty in Old Age People over the age of 80 are at risk of falling into poverty even if they have not been poor earlier in life. Also, they have greater...