The federal government spends a large amount of money to support the living standards of elderly people — primarily through Social Security and Medicare but with significant helping hands from Medicaid and disability insurance. That amount is growing as a share of the economy because productivity growth is slowing, and because birthrates continue to fall (in line with a long-term trend), but mostly because Americans are living longer.
To many people in Washington, that rising life expectancy is itself a full rationale for cuts to the program. "If you can't raise the retirement age to 68 by the year 2050 without the AARP losing their marbles," former Sen. Alan Simpson, co-chair of the Simpson-Bowles commission, once said, then the country just "won't make it."
The truth, however, is that the extension of life expectancy in recent decades has been a profoundly class-driven matter — with richer Americans experiencing the vast majority of the gains. This has profound implications for how America’s major retirement security programs work, and for which groups would be hurt if those programs are changed. Raising the age at which you can claim Medicare benefits by a year or two, for example, lops off a far larger share of the expected retirement period of a poor person than a rich one.
Working out the full implications of any proposed change is extraordinarily difficult. That’s why it took a superstar team of 13 academics — economists, public health experts, and demographers — to produce this new magisterial study of how life expectancy inequality intersects with possible program changes. And the upshot of their analysis is clear even if the authors don’t directly draw it themselves. To counteract the downward spiral of inequality, we need to raise taxes on affluent families.
Raising eligibility ages makes a regressive situation worse
The researchers start with a basic demographic forecast. According to their work, a man who turned 80 in 2010 would, on average, have a longer life expectancy than was enjoyed by a man who turned 80 in 1980. The average, though, is misleading. For men in the top 40 percent of the income distribution, that amounts to seven or eight extra years of life. But for men in the bottom 40 percent, it amounts to basically nothing.
That growing inequality in life expectancy between people born around 1930 and people born around 1960 has changed the distributive implications of America’s retirement programs.
Historically, the distribution of benefits was about flat. Richer people received more Social Security benefits, but that was offset by higher Medicaid and disability insurance payouts to lower-income people. But for younger cohorts, the affluent get about $130,000 more in lifetime benefits than the poor. And they find that the most simplistic forms of program cuts that involve raising the age at which you can first claim benefits exacerbates the situation:
- Raising the Medicare age from 65 to 67, as the Obama White House and congressional Republicans contemplated in budget talks, would reduce low-income men’s wealth by about 1.4 percent and high-income men’s wealth by just 0.5 percent.
- Raising the earliest age at which one can claim Social Security benefits from 62 to 64, similarly, ends up being regressive. What’s more, the researchers argue that this change would actually increase total lifetime benefit payments on average because people who opt to retire early end up with lower monthly payments.
Benefit cuts generally hit the rich harder than the poor
The researchers also simulate the effect of a couple of proposals that aim to specifically target benefit cuts at more affluent retirees — and find, not surprisingly, that this works. The more striking claim is that a broad, across the board cut in benefits has a progressive distributive impact because richer people live longer.
- A common proposal to cut the monthly cost of living adjustment (COLA) for Social Security benefits, for example, reduces higher-income men’s wealth by 0.6 percent and lower-income men’s wealthy by only 0.4 percent. The impact of the COLA accumulates over time, so it matters more to higher-income men.
- Interestingly, the team also finds that raising the so-called “normal retirement age” by three years, from 67 to 70, cuts benefits more for the rich. Wealth falls for poorer men by 4.8 percent, while for more affluent ones it falls by 5.2 percent.
This latter finding stems from the fact that despite the rhetoric of “raising the retirement age,” in a practical sense lifting the NRA is simply an across-the-board benefits cut. The way Social Security works is that you get an initial benefit, which is pegged to the amount of payroll tax you paid in your working years. You can claim this benefit at any time between the age of 62 and 70.
But if you choose to retire before the NRA (traditionally 65), your benefits are reduced — and they are reduced more the earlier you retire. If you delay retirement past the NRA, your benefits are enhanced, and they are enhanced more the longer you delay.
So when the NRA was raised from 65 to 67, nothing changed about when you can retire. It’s simply that benefit reductions got bigger and enhancements got smaller. Raising the NRA further would, again, simply mean that everyone’s monthly check goes down regardless of when you choose to retire. Since more affluent men live longer than poorer men, this winds up being a progressive change in the benefit structure.
Politics has left this issue behind — but it’s still important
Even though this is brand new research, it in some ways feel like a paper that’s hopped on a time machine back to five years ago, when bipartisan negotiations over entitlement cuts were all the rage in Washington. By 2016, both Hillary Clinton and Bernie Sanders were running on proposals to expand Social Security benefits, and Donald Trump promised to avoid cuts to Social Security or Medicare.
The paper simply does not discuss popular and clearly progressive options for closing the Social Security financing gap like raising taxes on the rich.
Nor does it consider the implications of lowering the eligibility age for Medicare, incorporating some kind of buy-in option to the Affordable Care Act structure, or any of the various plans to turn Medicare into a universal program that benefits Americans regardless of age. Rather, the authors are offering what amounts to a road map for considering different austerity options, and they show that, to an extent, some forms of benefit cuts can be construed as narrowing the gap between higher- and lower-income Americans.
The most important conclusion of the paper may be about the sharp limits of the kind of strategies the authors discuss. Several kinds of benefit cuts are progressive in their distributive impact, but, as the authors write, “their impact on progressivity tends to be small compared to the changes arising due to differential changes in life expectancy.”
Rising economic inequality, in short, has fed growing inequality in life expectancy, which, through the operation of American retirement programs, has generated even more economic inequality. And the kind of program tweaks that have been discussed by budget cutters don’t come close to closing that gap. A tax-based strategy that took from the haves and used it to avoid the need for cuts, by contrast, really might.