Friday, December 19, 2008

69.8 -- the New 65

Forty may be the new 30, but the braniacs in charge of the U.S. Social Security and Medicare programs haven't figured out what to do about it. As life expectancies lengthen, so do taxpayer liabilities for pensions and health care with the consequence that, sooner or later, both will default on their obligations to the public.

Warren Sanderson and Sergei Scherbov may have part of the answer. Instead of basing pensions and other benefits upon peoples' chronological age (how long they've been alive), we should consider peoples' "prospective" age (how long they're expected to live.)

The conventional definition says "old age" starts at age 65. But Sanderson, an economics professor at Stony Brook University, and Scherbov, a researcher at the Vienna Institute of Demography, question the relevance of that definition as life spans lengthen. Consider: In 1952 the average 30-year-old French woman had an average life expectancy of 44.7 more years. By 2005, the average 40-year-old French woman had an average life expectancy of.... 44.7 more years. Chronologically, the 40-year-old woman was a decade older. But was she truly "older"? (As you ponder that question, consider that the photo above captures French actress Catherine Deneuve at age 40 in the movie, "The Hunger.")

In their paper, "Rethinking Age and Aging," in Population Bulletin, the demographic duo define "old age" as the age at which, based on the average life expectancy of a given society, a person has 15 years left to live. In the United States, that age is 69.8 -- nearly five years chronologically older than the standard retirement age today. By the year 2045, "old age" is forecast to commence at 72.8.

Think what would happen if "old age" benefits (Social Security, Medicare, pensions) were geared to life expectancy rather than chronological age. Americans would have to work longer before collecting the gold watch and planning for that cruise around the world. But they'd still have a social safety net to cover them when they became frail and infirm. On the flip side, society could far better afford the social safety net. Instead of an "age dependency ratio" of 37.1 "old" people supported by 100 in the working-age population by the year 2045, the ratio would be only 21 per 100.

Sanderson and Scherbov don't go quite that far. On the one hand, they argue that basing pensions on a fixed chronological age provides a windfall for old guys who paid into the system for a fixed number of years then collect benefits over ever-lengthening periods of retirement. On the other, basing pensions on a fixed prospective age would be unfair to older generations. "As life expectancies increase," they write, "they would have to pay into the system for more and more years, only to receive benefits over a fixed average period."

One solution, they suggest, would be to build payments and benefits around the average of chronological and prospective ages.

As Baby Boomers, we'd like to start raking in benefits by 65 just as much as the next guy. On the other hand, we'd like there to be a social safety net when we need it. Social Security might conceivably survive in its current form, but Medicare is a goner. It seems like Sanderson and Scherbov have provided a rational and objective criteria for recalibrating social expections and salvaging our "old age" protections.

(Photo credit: Fluffiest Blog in the West.)

1 comment:

Jim Bacon said...

I am posting this comment on behalf of David J. Kupstas. - Editor

As a pension actuary, I'm particularly interested in this topic. However, I'd like to make a more general statement.

As you are undoubtedly aware, the government is inserting itself into our lives in a lot of ways lately. You have the $700 billion bailout, the possible auto bailout, etc., etc. Some say that the government HAS to do these things because the consequences of NOT doing them would be worse than the pain or taxpayer expense of DOING them.

Let's say that's true. I think some people are reluctantly going along with some of these meddlesome government policies for that very reason. "Well, I don't believe in bailouts generally, but I have to support it because it's catastrophe if there is no bailout." Has anyone considered that a lot of things we're saying government HAS to do are the best option only because of some other instrusive thing government has done before?

A classic example is, we must have seat belt laws because it would be so expensive for the taxpayers to cover the injuries of those who aren't wearing seat belts. To which one should respond, "Why are the taxpayers paying for medical care to begin with?"

That some are saying basing pensions on a fixed prospective age would be unfair to older generations is another such example. Listen to what is being said: "As life expectancies increase, they would have to pay into the system for more and more years, only to receive benefits over a fixed average period."

You must be talking about Social Security since most private pensions are fully employer-paid. And if it is bad policy to raise the retirement age because of all those who have "paid into the system" for so long, then why have people had to pay into the system to begin with? Social Security is nothing but a Ponzi scheme.

I just fear that government is inching -- no, racing -- toward 100% control of our lives.

I know this issue is not your bailiwick at the Boomer Project, but your blog today really touched a nerve.

David J. Kupstas

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