Unequal Lives, Unequal Benefits: Life Expectancy and Social Security Rules

Social Security retirement programs are designed to provide full insurance against longevity risk through a progressive benefit scheme. Consistent with previous work on earnings and race, we document life-expectancy gaps at age 65 of 2 years by wealth and 6.75 years by health. Such significant differences in life expectancy reduce the program's progressivity. We examine the welfare costs of ignoring this observable information by incorporating either a wealth- or a health-based correction factor to the current program. For the analysis, we build a rich life-cycle model in which married men decide their savings, labor supply, and benefits-claiming age, and are heterogeneous in many dimensions, most notably their fixed health type. We find that the average welfare losses from ignoring wealth-related differences in life expectancy at the claiming age are equivalent to a 1.69% permanent reduction in consumption, with both health types experiencing welfare losses. By contrast, ignoring health-related information at the claiming age generates average welfare gains of 0.72%, but with highly uneven welfare effects across health types: while the tax burden of the transfers is concentrated largely among health type 1 individuals, health type 2 households experience a welfare loss equivalent to a 6.84% permanent consumption fall.