People with different levels of wealth and health do not live equally long. This matters for Social Security because a system designed to protect retirees can become less progressive when longer-lived groups collect benefits for more years.
In Barcelona School of Economics Working Paper 1556, “Unequal Lives, Unequal Benefits: Life Expectancy and Social Security Rules,” Javier Fernández-Blanco and Virginia Sánchez-Marcos evaluate the welfare implications of retirement benefits that ignore predictable differences in life expectancy.
Using US data and a life-cycle model of work, saving, and benefit claiming, they find that the welfare losses of ignoring differences in life expectancy by wealth and health at the claiming age are equivalent to a permanent consumption fall of 2.2% and 0.3%, respectively.
Life Expectancy Differs Sharply by Wealth and Health
Using data from the Health and Retirement Study (HRS), the authors show that among married men at age 56, those in better health live about 5.5 years longer than those in worse health, while those at the top of the wealth distribution live about 2.5 years longer than those at the bottom.
Note: Survival rates for married men aged 56
The authors build a life-cycle model in which individuals decide their savings, labor supply, and benefits-claiming age, and are heterogeneous along several dimensions, in particular their health status.
The paper argues that when benefits do not reflect predictable differences in life expectancy, the system can end up redistributing from shorter-lived groups to longer-lived ones. To study this, the authors simulate simple adjustments that make annual retirement benefits depend on either wealth or health at the claiming age.
A Wealth-based Adjustment to the Social Security Retirement Scheme Generates Modest but Broad Gains
When benefits are adjusted for differences in life expectancy by wealth, the welfare loss from ignoring those differences is equivalent to a permanent 2.2% fall in consumption.
The behavioral effects are limited: labor supply changes little, but poorer and less healthy individuals save less and delay claiming somewhat because they expect more generous benefits. Overall, this reform produces modest but broadly shared gains.
A Health-based Adjustment Has Stronger Distributional Effects
When benefits are adjusted for health-based differences in life expectancy, the average welfare loss from ignoring those differences is smaller, equivalent to a 0.3% fall in consumption. However, this average hides large differences across groups. Individuals in persistently poor health gain substantially from a health-based adjustment, while healthier individuals can lose because they would receive lower benefits under the reform. These adjustments also change behavior more strongly: unhealthy individuals work less near and after retirement age, while healthy individuals delay claiming.
In sum, the paper shows that heterogeneity in life expectancy by wealth and health has important implications for the incidence and welfare effects of Social Security.
Key Findings
- There are large differences in life expectancy by wealth and health at age 56
- Welfare losses of ignoring predictable differences in life expectancy at the pension claiming age are substantial
