H.L. Mencken once observed “For every complex problem there is an answer that is clear, simple, and wrong.” If he were alive today, he could point to Social Security reform as an example. This issue is very complex, yields a clear and simple answer: Americans are living too long. It is likely wrong.
The answer is based on data which shows life expectancy increasing from 63 in 1940 to more than 77 today. The logical conclusion is that Americans are living longer and thus receiving benefits for more years. The problem with this answer is that it combines faulty reasoning and bad data.
Increasing life expectancies does in fact create two financial burdens for Social Security. First, it can mean that people are living longer in retirement so that they will collect benefits for a longer period of time. Second, it also can mean that people become more likely to reach the age where they can collect benefits at all. Yes, as Americans live longer, Social Security will pay more in benefits.
Those consequences are however only half of the story. What the argument fails to consider is that Americans who live longer, work longer and contribute more to Social Security. So it is very possible that rising life expectancies can improve the financial imbalances in Social Security. It really depends upon at what age Americans are living longer.
The primary cause of this increase in life expectancy is a reduction of infant mortality. Believe or not, fewer babies dying is a financial plus for Social Security. Infants born after 1963 statistically will on average collect less than they contribute to Social Security. The data from the Urban Institute a non-partisan think-tank says that an average wage worker (single or married, male or female) contributes more than he expects to collect – and that assumes every worker lives to the age of full-retirement.
Many do not. Advances in medical science saved my brother at the age of 21. Better doctors and better medicine allowed him to work until he died at the age of 44. Over the 23 years of additional life, my brother contributed close to $60,000 without ever collecting a penny. Life expectancies of Americans rose because of people like my brother, and yet Social Security made a lot of money on the increase.
This argument also ignores the way Social Security works. The benefits formula uses the 35 highest years of earnings to compute benefits. Thus when a worker works 36 or more years, the benefits formula removes a year of earnings. As a consequence of math, Social Security in many cases collects free money by Americans living longer. Americans whose life expectancy extends from 55 to 67 are at times a cash-cow for Social Security.
Projecting life expectancy is not an exact science. In fact, the Social Security Administration has faced public scrutiny over its estimation model. I provide some research here to create some a framework for prospective. According to research from SSA, the life expectancy of the average 30 year-old male (someone who typically has attained eligibility for benefits) increased by almost 9 years since 1940.
The average 65 year-old male in 1940 expected to live about 12 years, whereas in 2010 he expected to live 16.4 years. Today Social Security requires people to wait an additional two years, the increase in retirement benefits based on this research would be less than 2.4 years.
Statistically, Americans are more likely to reach the age of full retirement. In 1990, the SSA projected that someone who was 21 had a 72% of reaching full retirement-age. The Social Security Administration reports that figure had risen to slightly less than 79% by 2009.
I wish that I could tell you that the original conclusion was completely wrong. I can’t. I can tell you that life expectancy of an infant is not relevant to a discussion about a pension system. I can tell you that the conclusion is based on half the story. If the answer is right, it has more to do with luck than research.