Bad News on Social Security: We're Going to Live Longer

January 06, 2013

That’s what Gary King and Samir Soneji tell us in a NYT column this morning. The gist of the piece is that the authors have assessed trends in mortality rates from a variety of factors and concluded that the Social Security Administration is underestimating life expectancy. Therefore the program will cost more than is projected, meaning that the long-term funding gap is larger than projected.

Before dealing with the scary prospect of living longer let’s first address some trivia. The piece tells readers:

“For the first time in more than a quarter-century, Social Security ran a deficit in 2010: It spent $49 billion dollars more in benefits than it received in revenues, and drew from its trust funds to cover the shortfall.”

That’s not exactly right. The program spent more than it received in payroll taxes, but Social Security also earned more than $117 billion in interest on the government bonds in the trust fund. This means that the program actually had an annual surplus and the trust fund grew in 2010.

But let’s get to the crisis of living longer. Based on their projections of life expectancy, King and Soneji calculate that in 2031 Social Security will cost about 0.65 percentage points more than the trustees currently project measured as a share of taxable payroll. This comes to 0.25 percentage points measured as a share of GDP.

Should we be scared by this? Well, the amount is certainly not trivial, but the increase in defense spending associated with the wars in Iraq and Afghanistan came to 1.7 percent of GDP. So, we have dealt with much bigger expenses without too much disruption to the economy. So if King and Soneji’s projections prove accurate, Social Security will not exactly be breaking the bank.

However there is a bit more to the story. They only dealt with the impact of improving health on life expectancy. There are other ways in which better health can be expected to affect the finances of the program. For example, the disability portion of the program currently accounts for almost 18 percent of the program’s cost. If better health reduced disability rates then this could go a substantial portion of the way toward offsetting the higher costs associated with a longer period of retirement.

The second way in which better health could affect Social Security projections is by allowing people to work later into their life. A substantial portion of retirees are forced to retire due to poor health. If these people were in better health, many workers might put in more years of work before retirement, thereby improving the finances of the program by increasing tax collections.

Better health might also mean slower growth in health care costs. One drain on the Social Security system is the money paid to workers in the form of employer provided health insurance. This money, which has been a rapidly growing share of compensation, is not subject to the Social Security tax. If better health reduces the rate of growth of health care costs, a larger portion of compensation may be subject to the payroll tax, which would also improve the program’s finances.

Finally, improved health would likely reduce the cost of other government programs like Medicare. This could means that we will be paying out more money in Social Security to retirees but paying less for their Medicare and Medicaid expenses.

All these effects may not be entirely a wash, meaning that our longer lives will mean more net expenditures from the government, but we would want to look at all these factors before we hit the panic button.  


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