The U.S. population is aging, in part because of increasing life expectancy and in part because of low fertility rates. Social Security projections suggest that between 2013 and 2050, the population aged 65 and over will almost double, from 45 million to 86 million (Board of Trustees, Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, 2014). The fraction of the population aged 65 and over will rise from 14 to 21 percent. Population aging will have important fiscal effects as well as effects on the broader economy.
One key driver of population aging is ongoing increases in life expectancy. Five decades ago, average U.S. life expectancy was 67 years for males and 73 years for females; the averages are now 76 and 81, respectively. Longer life is an important component of improved human well-being, but longer lives potentially strain the U.S. economic system because older people are less likely than younger adults to work and, as a group, older people consume much more than they earn through their labor. A substantial amount of policy discussion has focused on this increase in average life expectancy and the fiscal burden it imposes on programs such as Social Security. Policy makers, however, have focused much less on the distribution, rather than the average, of changes in life expectancy.
It has long been the case that better-educated, higher-income people enjoy longer life expectancies than less-educated, lower-income people. The causes include early life conditions, behavioral factors (such as nutrition, exercise, and smoking behaviors), stress, and access to health care services, all of which can vary across education and income. Over the past several decades, however, a number of studies have found that the gradient in life
expectancy by education and income has become steeper: the gap in life expectancy between the top and the bottom has become larger.
A core question the committee examines in this report is what impact the growing gap in life expectancy has on the present value of lifetime benefits (net of taxes paid in later life) that people with higher or lower earnings will receive from major entitlement programs. As this report documents, rising inequality in life expectancy has important effects on the distribution of net benefits from some of this nation’s core public programs.
The report also examines how society might respond to disproportionate gains in life expectancy by certain segments of the population. For most government programs, the issue does not seem particularly relevant. For example, policy makers presumably need not worry about people with a lower life expectancy receiving lower lifetime benefits from defense or environmental programs. For programs such as Medicare and Social Security, however, it is more natural to consider the concept of lifetime benefits. The committee discusses the distinction between ex ante inequity (i.e., expected differences across identifiable groups) and ex post inequity (i.e., differences in realized outcomes across individuals, even within the identifiable groups). We also explore, from a lifetime net benefit perspective, how the growing gap in longevity affects traditional policy analyses of reforms to the nation’s leading entitlement programs.
Division C Title I of the Consolidated Appropriations Act, 2010 (Public Law 111-117) mandated that the Department of the Treasury engage the National Academy of Sciences in a contract to study the long-term economic effects of an aging U.S. population. Because of funding uncertainties, this contract was split into two sequential phases. In Phase I of the project, the purpose was twofold: (1) to investigate the prospects for older Americans to maintain adequate living standards, given recent trends in public and private pension provision, personal savings, longevity, and health; and (2) to consider the expected effects of an aging population on wages, productivity, returns to savings, wealth, and other macroeconomic variables.
Phase I began in September 2010 and culminated in the 2012 report Aging and the Macroeconomy: Long-Term Implications of an Older Population (National Research Council, 2012). That report summarized existing knowledge in seven main topic areas,1 discussed various policy implications, and offered a set of research recommendations. The goal of the study
1The seven areas were demography, health and disability, labor force participation and retirement, productivity and innovation, saving and retirement security, capital markets and rates of return, and fiscal policy.
was to provide a factual foundation for the social and political debates that will intensify in the future. These debates, centered on deficit reduction, focus heavily on policies regarding public entitlements such as Medicare and Social Security. The report did not address the details of entitlement programs, because this has been done at great length elsewhere, nor did it offer specific policy recommendations. Rather, the intent was to understand the broader and more fundamental factors related to population aging, to clarify policy-relevant issues, and to suggest policy levers that could be useful in designing responses to population aging.
In the course of the Phase I committee’s work, it became clear that a necessary next step would be to focus not only on the impact of discrete factors but also on the interactions among factors. The Phase I Committee concluded that it would not be feasible for that committee to quantify these broad macroeconomic effects of population aging through use of a macrosimulation model incorporating the key economic feedbacks and intergenerational linkages. Instead, it left to the Phase II study the task of investigating and quantifying, with an appropriate model, the key interactions of the steepening mortality gradient with government programs and of assessing possible policy responses for these programs that would help to meet the fiscal challenges posed by an aging population.
There is a broad consensus in the United States that population aging will place fiscal pressure on the major government programs that help support older persons in this country. Official projections show that Social Security, Medicare, and Medicaid are on unsustainable paths, and failure to remedy this situation raises a number of economic risks. Rising health care costs per person mean that the fiscal burden of the Medicare and Medicaid programs will be particularly acute as time elapses and the population ages.
This committee was charged with building on the previous (Phase I) study by considering the policy implications of certain macrolevel changes in the U.S. population. The primary focus in this Phase II report is on the implications of increases in the widening distributions of longevity by long-term earnings for age-related public programs and for their reform to meet the challenges of an aging population. Among the tasks assigned to the committee was “examination of how the growing gaps in income and life expectancy affect national public programs such as Social Security, Medicare and Medicaid, and how these gaps interact with proposed policy adjustments to achieve sustainability in the context of population aging.” For the complete statement of task, see Box 1-1.
Project Statement of Task
An ad hoc committee shall conduct a study that will help clarify the long-term macroeconomic effects of population aging in the United States. Phase I of the study and the resulting 2012 report summarized what is known about how factors such as savings rates, stock market exposure, productivity, consumption patterns, and global capital flows react to demographic shifts. Phase II of the study shall incorporate quantitative modeling and projections in order to develop new insights about the long-run macroeconomic effects of the aging U.S. population. The primary focus of the study will be on the implications of increases in the spread of population distributions of income and longevity for age-related public programs and for the reform of these programs to meet the challenges presented by an aging population.
Phase II of the study shall include, but will not be limited to, the following elements:
- Evaluation of long-term trends in the share of national output devoted to support of the elderly population.
- Documentation and exploration of the underlying causes of the growing gaps in income and life expectancy in the United States.
- Examination of how the growing gaps in income and life expectancy affect national public programs such as Social Security, Medicare, and Medicaid, and how these gaps interact with proposed policy adjustments to achieve sustainability in the context of population aging.
- Construction of generational accounts by lifetime income or education for different population cohorts under different policy regimes.
Chapter 2 of this report provides a brief overview of population aging in the United States as elaborated in the Phase I study (National Research Council, 2012). The chapter discusses why population aging is an economic problem and examines measures and descriptors of individual heterogeneity in an aging population. It also briefly considers the need for entitlement reforms and the importance of evaluating potential reforms from the perspective of their likely impacts on different population groups. The chapter concludes with a summary description of the Future Elderly Model, the committee’s primary tool for modeling economic outcomes across individuals and estimating net benefits by lifetime earnings for key government programs.
The widening gap in U.S. life expectancy by income group is the focus of Chapter 3. The chapter examines other published analyses showing a steepening of the mortality gradient by income and education and examines some of the possible causes. It presents new projections of the changing gradient by a measure of lifetime earnings. It also provides some insight into the possibility that trends seen over the past several decades will continue in the future, and it explores the implications if they do.
Chapter 4 considers how a society should react to disproportionate mortality gains among different segments of the population and discusses the effects of differential mortality on retirement incentives. It then looks at the policy implications of differential mortality and assesses the impacts of the historical and projected changes in mortality gradients on Medicare, Social Security, and other entitlement programs using the Future Elderly Model. The committee’s estimates show a noticeable projected change in the distribution of net benefits across lifetime earnings categories, driven by the differential trends in mortality.
In Chapter 5, the committee turns to policy interventions and assesses some commonly proposed policy changes from the perspective of the differential trends in mortality. For example, many proposals to increase the normal retirement age under Social Security are motivated by the rise in average life expectancy. As this report documents, however, the average masks substantial historical and projected differences across various earnings categories; we show the impact of that proposal and others on lifetime benefits across the earnings categories and in a manner that reflects their different life expectancy trajectories. We also explore a potential reform to Medicare.
Chapter 6 provides a brief set of conclusions.
Appendix A provides biographical sketches of committee members.
Appendix B, a comprehensive and technical appendix with model details, is not printed in this volume. The appendix and accompanying Excel workbook are available to download at nap.edu/GrowingGap under the Resources tab.
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