John B ShovenTrione Director of SIEPR

Adjusting Institutions for Longer Lifetimes

Working Longer

Living Longer – It is a FactThe Probability of Future Birthdays for 65-Year Olds

0

10

20

30

40

50

60

70

80

90

100

65-year old males in 1955

50% Chance ofReaching 77.5

20% Chance ofReaching 85

8.8% @ 90

Dwight Eisenhower and Groucho Marx were 65 in 1955

%

Living Longer – It is a FactThe Probability of Future Birthdays for 65-Year Olds

0

10

20

30

40

50

60

70

80

90

10065-year old males in 1955

65-year old males in 2014

50% Chance of Reaching 77.5

50% Chance of Reaching 85

20% Chance ofReaching 85

75% Chance of 77.5

30% Chance of 90

8.8% @ 90

60% increase

e.g. Bruce Springsteen

%

Living Longer – It is a FactThe Probabilities of Future Birthdays

0

10

20

30

40

50

60

70

80

90

100

65-year old males in 1955

65-year old males in 2014

65-year old females in 1955

65-year old females in 2014

40% Chance ofReaching 90

5.6% ChanceOf 100

Meryl Streep turns 65 in 2014Agatha Christie turned 65 in 1955

%

Are These Four People Really the Same Age?

Table 2. Life Expectancies of Retirement Age Married Couples

Age of Age of Expected Years Expected Years Expected Length Husband Wife to First Death to Second Death of Widowhood

62 60 17.53 (28) 29.11 (37) 11.58 63 61 16.85 (27) 28.21 (36) 11.36 64 62 16.18 (26) 27.31 (35) 11.13 65 63 15.51 (25) 26.41 (34) 10.90 66 64 14.85 (24) 25.52 (33) 10.67 67 65 14.19 (23) 24.64 (32) 10.45 68 66 13.53 (22) 23.75 (31) 10.22 69 67 12.89 (21) 22.87 (30.5) 9.98 70 68 12.26 (20.5) 22.00 (29.7) 9.74

Note: Numbers in parenthesis represent 90th percentile outcomes Data: Cohort life tables from Social Security used in the 2012 Trustees Report for men born on 1/1/1951 and women born on 1/1/1953

Retirement Lengths for Couples

A Few Important Facts

• Average retirement age is 64 for men, 62 for women

• At those ages, people need to prepare for at least 30-year retirements

• At those ages, the survivor of a couple outlives their spouse by an average of 11 years

• YOU CAN’T FINANCE 30-YEAR RETIREMENTS WITH 40-YEAR CAREERS!

The Consequences of Trying to Finance 30-year Retirements with 40-Year Careers

• Vastly underfunded state and local pension funds

• Social Security Trust Fund becomes exhausted in 2033, followed by a roughly 25% cut in benefits

• Fewer workers relative to retirees

• Lower standard of living for retired workers

What Can We Do About It?

• The easiest solution is to work longer

• For instance, 48-year careers and 22-year retirements

• Today’s Stanford undergraduates probably will need to work until at least 70

Hidden Early Retirement Incentives Need to be Eliminated - I

• Social Security turns into a pure tax on work soon after 35 years of work

• Introduce “Paid Up Workers” = People who have already worked 40 years. Paid Up workers would not face either the employer and the employee payroll tax for Social Security and Medicare

• This would remove a 15.3% wedge between employer’s cost and employee’s take home pay

Hidden Early Retirement Incentives Need to be Eliminated - II

• Medicare could be changed from Medicare as a Secondary Payer (MSP) to Medicare as a Primary Payer (MPP)

• Today, people 65+ get Medicare unless they work. If they work, then the employer sponsored health plan must include them.

• MPP would mean that those 65 and over would be covered by Medicare whether they work or not

Simply Change the Terminology of Social Security – Change Full Retirement Age to 70

62 63 64 65 66 67 68 69 701,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

Monthly Benefits for Different Commencement Ages

Benefits at Official Full Retirement Age

Possible New Definition of Benefits at “Full Retirement Age”

Why Not Have the Full Retirement Age Correspond to the Maximum Monthly Benefit?

We Need To Change Labor Market Institutions to Reflect Longer Lifetimes

• Change Social Security – Paid Up• Change Medicare – MPP• Change the “Full Retirement Age”• Facilitate Part Time Opportunities for Senior

Workers• Retrain workers in their mid-career• Look at how Japanese labor markets work

Only Economists Could Turn Living Longer Into a Problem!