Illustration by Jan Buchczik

Life-Span Gap Skews Entitlements Toward the Well-Off

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Oct. 3 (Bloomberg) -- As policy makers peer into the abyss below the fiscal cliff, they are beginning to talk about making changes to Medicare, and perhaps even Social Security. When looking at these programs, they would be wise to take into account the widening gap in life expectancy -- a gap defined by education and income.

Since better-educated, higher-income Americans are living longer than everyone else and therefore collecting benefits longer, Medicare and Social Security are becoming less progressive on a lifetime basis. Fortunately, there are ways to offset this gap.

The average life expectancy at birth in the U.S. is now 78.7 years. But in life expectancy, as in many things, averages obscure many details.

Higher-income people have pretty much always lived longer than lower-income people. In the early 1970s, however, the gap started expanding rapidly. In measuring this phenomenon, researchers typically look at education, rather than income, because education is correlated with lifetime income but is not affected by bouts of ill health, which can skew the relationship between current income and health status.

In 1990, 20-year-old white women who had at least a college degree were expected to live to age 81, while those with less than a high-school degree were expected to reach 79, a recent study in Health Affairs found. By 2008, however, that two-year gap had widened to more than 10 years. For 20-year-old white men, the difference grew from five years in 1990 to 13 years in 2008.

Changing Expectations

Other studies show a similar pattern: For people high on the scale of socioeconomic status, life expectancy is rising at a decent clip. For those at the bottom, it is stagnant at best - - and in many cases is actually declining.

A complicating factor in these analyses is that the kind of people who lack, say, a high-school diploma today are different from those who didn’t have one in the past. Still, it is clear that the gap is growing for reasons that go beyond this selection effect.

One of these is smoking, which hasn’t declined as quickly among less-educated people as it has among the highly educated. Other reasons include changes in marriage patterns and social ties, and the economic return that education brings.

“Education exerts its direct beneficial effects on health through the adoption of healthier lifestyles, better ability to cope with stress and more effective management of chronic diseases,” the authors of the Health Affairs article write. “However, the indirect effects of education through access to more privileged social position, better-paying jobs and higher income are also profound.”

One clear implication is that boosting people’s education has important benefits in addition to productivity. Yet that won’t have much impact on people already well along in their careers, and the longevity gap is widening even among people on the verge of retirement. Just since 1990, the difference in life expectancy between the most- and least-educated 65-year-olds has grown by almost five years.

For programs such as Social Security and Medicare, the consequences are easy to see. Consider the present value of $1 that a white man turning 65 can expect to receive each year of his remaining life. In 1990, when the best-educated men could expect to live an additional 16 years and the least-educated, 15 years more, the difference in the present value of that $1 amounted to about 5 percent. By 2008, when the men at the top of the scale could expect to live five years longer, the present-value gap was more than 25 percent.

In our 2005 book, “Saving Social Security,” the economist Peter Diamond and I argued that the formula used to set people’s annual Social Security benefits should be made more progressive to offset the increasing gap in life expectancy.

Medicare Effect

When it comes to Medicare, offsetting the longevity gap is a bit more challenging, because there is no straightforward formula to work with. (It is also less clear what the level of lifetime progressivity for Medicare is in the first place. While most studies suggest that Social Security remains moderately progressive on a lifetime basis, the evidence on Medicare is mixed. One major study found it to be regressive on a lifetime basis, and another did not.)

If Medicare were shifted to a premium-support program -- a change that would create other problems, as I have explained -- the widening divide in life expectancy would justify a much larger annual subsidy for people at the bottom of the income distribution than for those at the top. Given how the program is structured now, however, policy makers should look for still more ways to link copayments to income, as is already done for Medicare Part B and Part D premiums.

Negotiations in Washington over how to address the fiscal cliff offer an opportunity to update both Medicare and Social Security to offset the trends in life expectancy. Although we may not be able to do anything immediately to lengthen the lives of America’s poorest and least-educated people, we can at least even out the resulting differences in their lifetime Social Security and Medicare benefits.

(Peter Orszag is vice chairman of corporate and investment banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)

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