Longevity Insurance: Strengthening Social Security at Advanced Ages
John A. Turner
Survivor While Social Security provides a guaranteed lifetime benefit, it is insufficient
for most people to maintain their pre-retirement standard of living. Thus, except for
people with low pre-retirement incomes, most people need to supplement their Social
Security benefits with other sources of income. While low-income retirees tend to
rely largely on Social Security, other retirees tend to have other sources of retirement
income. However, as people grow older, especially for those living past their life
expectancy, they risk having exhausted their sources of income other than Social
Security.
People in their 80s with low Social Security benefits are vulnerable. Few are able to
compensate for a loss of non-Social Security income by working. People in this age
group, often called the old-old, who were financially secure at younger ages may
not have sufficient resources left to enjoy the last years of their lives with dignity.
The target population for this proposal is people age 82 or older with low Social
Security benefits and long work histories. Age 82 is chosen as approximately the
average life expectancy at age 65. Elderly poverty is high among this age group–
a third higher than for people age 65-69. People in this age group are at risk of
having fallen into poverty or financial distress even though they had not been poor
earlier in life. They have greater difficulty leaving poverty than people at younger
ages. Improving Social Security for this group would provide cost effective social
insurance.
This proposal strengthens social insurance for people in their eighties and older by
adding longevity insurance to the social insurance protection Social Security provides.
Longevity insurance is a deferred annuity that starts at an advanced age. Much of
the utility value to retirees of annuitization comes from insuring against the possibility
of running resources down to a low level if one lives to be older than expected.
The longevity insurance benefit proposed here is a delayed annuity paid as an
enhanced Social Security benefit starting at age 82. Qualifying persons receiving a
Social Security benefit below a minimum level would have their benefit raised at that
age. Recognizing this new insurance protection, Social Security OASI would be
renamed Old-Age, Survivors and Longevity Insurance (OASLI). The renaming would
inform people about the benefit. This “framing” would help people focus on and better
understand the economic risk of living longer than their life expectancy.
In addition to serving as an enhanced insurance benefit, longevity insurance can
simplify the problem retirees face of planning asset decumulation in old age. Some
retirees have difficulty planning the spend down of their financial resources because
of the uncertainty of age at death. A longevity insurance benefit simplifies that problem.
Instead of planning for an uncertain period, they can plan for the fixed period from their
retirement to the date at which they start receiving the longevity insurance benefit.
Longevity insurance can be an important component of a package to restore Social
Security solvency. Public policy changes likely will reduce the generosity of Social
Security old-age benefits as part of a package to restore solvency. Most reform
packages that cut benefit raise elderly poverty. To offset that effect, there will be a
need to increase the generosity of some benefits to better target benefits to vulnerable
groups. That goal could be achieved by providing longevity insurance benefits.
As an alternative, survivors benefits could be raised, but that would be less targeted
and thus more expensive for achieving the same results for vulnerable persons.
Another alternative would be to raise minimum benefits, with the benefits being
available at an earlier age, such as age 62. Longevity insurance would be better
targeted by age. As life expectancy continues to increase, age 62 has become a
relatively younger age, compared to expected age at death. Further, providing minimum
benefits at an earlier age than the longevity insurance benefit would more likely affect
the labor supply of older workers.