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

1 - The Policy Challenges of Increasing Longevity: Paying the Costs of Living Longer

1 1 The Policy Challenges of Increasing Longevity Paying the Costs of Living Longer Increases in life expectancy are no secret, yet government policy does not explicitly deal with their well-known consequences for Social Security financing. Every day 12,000 baby boomers turn 50. Continuing improvements in life expectancy mean that those people will live longer on average than any previous generation. That fortunate development , however, poses public policy challenges as to how to pay for the living costs of those added years. This book focuses on public policy issues concerning Social Security , pensions, and older workers that arise because people are living longer. The question it addresses is, “What should be the retirement policy responses to increased longevity?” Not only has increased longevity occurred for all major demographic groups, but people are healthier at older ages. This book draws on international experience to recommend solutions for U.S. policy. The premise of the book is that public policy should recognize longevity policy as a distinct area—as we do now, for example, for climate change. The reason longevity policy is best treated as a unified policy area is that the challenges arising from increased longevity are best dealt with when the interrelationships between work at older ages, Social Security, and pensions are recognized. Rather than separately treating the issues raised by life expectancy in policies toward older workers, and in other unrelated policies concerning Social Security and pensions, a unified approach toward policies concerning Social Security , pensions, and work at older ages would facilitate making needed changes in each of the areas. Because of interconnections between these three areas, policy will be more effective if it considers them together, rather than separately. Furthermore, the book argues that policy should be developed that is directly related to the effects of increasing life expectancy. 2 Turner Social Security is projected to have insufficient funding to pay promised benefits on time. The 2010 report of the trustees of Social Security projects that Social Security will not have sufficient resources to pay benefits on time starting in 2037, at which point it will be able to pay 75 percent of promised benefits. The annual cost of Social Security benefits represented 4.8 percent of GDP in 2009 and is projected to increase gradually to 6.1 percent of GDP in 2035 and then decline to about 5.9 percent of GDP by 2050 and remain at about that level. The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASI and DI) Trust Funds is 1.92 percent of taxable payroll (Social Security Board of Trustees 2010). When Social Security is reformed to deal with its financing insuf- ficiency, the effects of the changes will depend on whether employers and workers extend work at older ages and what changes are made to pensions provided by employers. Features of Social Security affect when people retire, but so do pensions and labor market conditions. Living longer affects all three areas, so that policy dealing with greater life expectancy should address all three areas at the same time. Many of our social policies and employee benefit policies were designed for an era when people had shorter lives. With the demographic changes occurring, it is time to reexamine those policies so that they fit the realities of the new demographic era of living longer. LIFE-EXPECTANCY INCREASES Overall Gains and Distributional Issues The policies proposed in this book are specifically designed to address the effects of life-expectancy increases. Thus, as a starting point, it is important to understand something about those increases. In the past 50 years, the increase in life expectancy at older ages has been considerable. Life expectancy at age 65 rose from 14.4 years in 1960 to 18.5 years in 2006, an increase of four years (Arias et al. 2008). This change has considerably increased the cost of providing pensions. The Policy Challenges of Increasing Longevity 3 Yet the full story is more complex than simply one of widespread increases in life expectancy. The United States has a diverse population in terms of both income and ethnicity. The disparities in life expectancy across some groups are large. When groups are broken into detailed categories by race, gender, and geographical area, the gap between the highest and lowest life expectancies at...