The next battlefield for the haves and have-nots won’t be money. It will be life itself. The conflict will start as more people understand that the well-off enjoy significantly longer lives than people who aren’t so fortunate.
The difference in years of life is real — and it is growing. While there is little talk of it yet, it’s likely that we’ll be hearing about the “life expectancy gap” by the next presidential election. One bit of evidence can be found in President Barack Obama’s budget: It vows to tighten how people claim their Social Security benefits.
The root document in all this is a 2007 study done by Hilary Waldron, an economist for the Social Security Administration. In the study, Waldron divided male workers into two groups, those in the top half of the Social Security wage base (about $60,000 a year and up today) and those in the bottom half. She found the life expectancy difference for men born in 1912 was only 1.2 years. The gap soared to 5.8 years for men born in 1941. The finding fueled the growth of a mini-industry: Financial planners helping their more-affluent clients select the best time to claim Social Security benefits.
The life expectancy gap is a good reason for lower earners to take benefits early: They would probably live shorter lives. The affluent, however, could gain by deferring benefits. They also have the financial assets to consider such choices. Since Social Security benefits increase rapidly with each year of deferral, the longer lives of the affluent make deferral a good investment.
Recent research has added heat to otherwise bloodless calculation. A 2012 study by demographer S. Jay Olshansky and others found that the life expectancy of white women with little education was actually shrinking. Between 1990 and 2008, poor and less-educated white women lost five years of life expectancy.
Yes, you read that right, five years lost, while most Americans were gaining about three years. The same study found that college-educated white Americans could expect to live at least a decade longer than black Americans with less than a high school education.
Ten years is a long time. It’s a difference large enough to dismiss benign assumptions about Social Security benefits. In effect, what anyone gets from Social Security may depend as much on their education and income as it does on their age. That reality will be the nexus of the coming longevity gap battle.
Economist Alicia H. Munnell has drawn a map of the battleground. Dr. Munnell directs the Center for Retirement Research at Boston College. It is a prolific source of research and, equally important, a great deal of it is presented in language non-economists can understand.
“Social Security’s Real Retirement Age Is 70,” a seven-page document that she released last October, is a good example. It lays out all the dimensions of the conflict — changes in average life expectancy, the life expectancy difference by education and income levels, and the reality that people with less education retire early.
She also shows the long-term impact that Medicare premiums and the taxation of benefits have on what she calls the net retirement-income replacement rate provided by Social Security.
Putting all those factors together, she shows a nice increase for those retiring at 70 instead of 65 — but a loss of retirement security for those who leave the work force at age 62, whether it is their choice or not. In 2010, for instance, a medium-income worker who retired at age 65 could expect Social Security to provide a real, after-Medicare premiums income replacement rate of 38 percent. The rate for retiring at that age will decline to 31 percent by 2030.
But workers who could work until 70 can sidestep the hit. Their replacement rate would be 43 percent by 2030. They can compensate for the factors reducing benefits by working longer.
Workers who need to stop working at age 62 — generally less-educated workers — will have a different experience. While their net replacement rate could be 38 percent if they could work to 65 in 2010, at 62 it is only 28 percent. And it will fall to 24 percent by 2030.
Without the option to work longer, their social safety net is eroding rapidly. Dying younger adds insult to injury.
Questions about personal finance and investments may be sent by email to email@example.com.