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Counting on Living Longer
People who reach retirement age these days are living longer than ever. The Centers for Disease Control recently released updated numbers that show median longevity for people at age 65 increased by six months from 2008 to 2009. (For some perspective, it increased by one month every two years in the 1990s and by two months every one year from 2000 to 2007.) That pace may be unsustainable, but I’m not qualified to speculate as to that — and I’m not sure if anyone else is either, frankly. But that’s not to say no one’s thinking about this: Older Americans are starting to discern that once they hit 65, they have a lot more living left to do. The only age cohort working more now than they were five years ago is people 60 and over, and a recent survey suggested that people in their 50s have radically increased their anticipated retirement age in the last five years. That’s no doubt in part due to the shock of the 50% stock market decline in 2007-2008 still being fresh in everyone’s mind, so people are starting to think long and hard about how long they will live and whether they have the resources to sustain themselves over that time. As more people reach retirement age with one or more parent still alive (a development that was simply inconceivable even a generation or two ago), the prospect of living to one’s 90s doesn’t seem so implausible after all to most people. A natural question to ask is whether people will simply insure against running out of money by buying annuities. Thus far it doesn’t seem like it: To many people, they still feel very opaque, and besides, they have something akin to an annuity in their Social Security benefits. For 30% of retired U.S. households, Social Security benefits constitute nearly their entire income. “People don’t buy annuities: they are sold” is a common refrain in the industry. In that state of affairs it’s hard to see people flocking to them no matter what kinds of tax breaks come with annuities, especially with the low returns they currently offer investors. For the top 40-50% percent of the 60-somethings, their current retirement calculus goes like this: They have Social Security, a private pension worth something (but not enough to live on), a house more or less paid for, and some other savings. They intend to leave something to their heirs, but it wouldn’t crush them (or their children) if they stuck around long enough to spend down their wealth. And I suspect that is precisely what will happen to a growing cohort of retirees. As people start coming to grips with their ever-increasing longevity, they’re increasing how much money they want to have set aside before they retire, and they are working longer — and saving a bit more as well. Is there a need for a vigilant public policy response? It does suggest that the push for Social Security solvency should become more urgent, that we may want to address the rising cost of health care, and in general that we should end the punitive taxation of capital income in order to buy us more economic growth to help pay for our obligations. But I’m hesitant to call this a crisis — maybe because the prospect of people living longer and healthier lives is nothing short of miraculous and something which we should all be grateful for. When naysayers question the fruits of the “supposed” economic growth of the last 20 years, this should be exhibit A. But big steps to limit health-care costs or reform Social Security are very difficult: Are there any baby steps we can take in the meantime? Perhaps. In a recent Wall Street Journal interview, George Shultz suggested we end the Social Security tax for people after they have paid into it for 40 years; research by Andrew Biggs at the American Enterprise Institute estimated that the labor supply increase would be so acute that the income taxes paid by this cohort would come close to making up for the lost payroll tax revenue. While that might not be a solution to our budget problem, it would have a sizeable impact on economic growth, at a time when demographic forces and the aftermath of the fiscal crisis aren’t helping matters.
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