Inequality and Retirement Peter R. Orszag Vice Chairman of - - PowerPoint PPT Presentation

I N E Q U A L I T Y A N D R E T I R E M E N T

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Inequality and Retirement Peter R. Orszag Vice Chairman of Investment Banking Lazard OECD April 2018

Average Life Expectancy Has Been Increasing…

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71 72 73 74 75 76 77 78 79 80 1980 1985 1990 1995 2000 2005 2010 2015 Life Expectancy at Birth, 1980-2015 Years Year 28 24 20 16 13 10 8 6 32 27 23 19 16 12 9 7 5 10 15 20 25 30 35 50 55 60 65 70 75 80 85 1980 2012 Additional Life Expectancy by Age, 1980 and 2012

Source: Centers for Disease Control and Prevention. Note: Estimates shown are for the entire population cross-section (i.e. both sexes and all races).

Years Age

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5 10 15 20 25 30 35 40 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 1980 2010

The gradient in life expectancy by income and education has grown much steeper over the past few decades

…But Almost Entirely Because of Gains to Higher Earners

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Since 1980, Life Expectancy for Men at Age 50 Has Diverged for the Top and Bottom Income Quintiles Life Expectancy for the Highest-Earning 1% of Men Is Now ~15 Years Longer Than for the Lowest-Earning 1%

Source: Auerbach et al. (2017) and Chetty et al. (2016). 1 Life expectancy data from men at age 40, computed on a lifetime basis.

Years of Life Expectancy Years of Life Expectancy1

70 72 74 76 78 80 82 84 86 88 90 1 11 21 31 41 51 61 71 81 91

Household Income Percentile 2

As a Result, Our Entitlement Programs Are Becoming Less Progressive on a Lifetime Basis…

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Source: National Academies of Sciences, The Growing Gap in Life Expectancy by Income: Implications for Federal Programs and Policy Responses (2015). 1 Entitlement benefits include Medicare, Medicaid, Social Security (both retirement and disability), and Supplemental Security Income.

Present Value of Entitlement Benefits1 at Age 50

Earnings Quintile Born in 1930 Born in 1960 Males Lowest $402,000 $391,000 2 347,000 366,000 3 344,000 432,000 4 364,000 499,000 Highest 402,000 522,000 Gap, High-Low $0 $132,000 Ratio, High/Low 1.00 1.34 Females Lowest $539,000 $452,000 2 405,000 373,000 3 394,000 386,000 4 373,000 357,000 Highest 410,000 480,000 Gap, High-Low ($129,000) ($28,000) Ratio, High/Low 0.76 1.06 3

Life Expectancy at Birth Across Poverty Percentiles

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Men Women

65 70 75 80 85 20 40 60 80 100 65 70 75 80 85 20 40 60 80 100

1990 2010 2000

Source: Currie and Schwandt (2016).

Poverty rank of county group Poverty rank of county group Life Expectancy at Birth Life Expectancy at Birth

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5 10 15 20 40 60 80 100 60 80 100 120 20 40 60 80 100

3-Year Mortality Rates Across Groups of Counties Ranked by Their Poverty Rate

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Females Males

Age 0–4

Females Males

Age 5–19

Females Males

Age 20–40

Females Males

Age 50+

Females Males 1 2 3 4 5 20 40 60 80 100 1 2 3 20 40 60 80 100 1 2 3 20 40 60 80 100 5 10 15 20 40 60 80 100 60 80 100 120 20 40 60 80 100 1 2 3 4 5 20 40 60 80 100

1990 2010 2000 Poverty rank of county group Poverty rank of county group Poverty rank of county group Poverty rank of county group 3 Yr. Mortality (per 1,000) 3 Yr. Mortality (per 1,000) 3 Yr. Mortality (per 1,000) 3 Yr. Mortality (per 1,000)

Source: Currie and Schwandt (2016).

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48% 46% 43% 50% 42% 34% 34% 32% 32% 30% 20% 25% 30% 35% 40% 45% 50% 1 Poorest 2 Second 3 Middle 4 Fourth 5 Richest Within-Country Household Income Quintile

Striking Differences in Stress and Optimism Across Demographic and Socioeconomic Groups Could Help Explain Differential Trends in Life Expectancy

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Odds of Being on a Higher Level of Optimism, by Income and Race Stress Inequality Across the Income Distribution in the US and LACs Impact of Stress on Life Satisfaction Exceeds That of Money, School1

Source: Graham and Chattopadhyay 2015, based on Gallup World Poll Data; Graham and Chattopadhyay calculations, based on Gallup Healthways data 2008-2013; Brookings Institute, Global Economy & Development Working Paper 104 June 2017. 1 The bar charts depict the effects of stress, income, and education on the life satisfaction (measured on a 0-10 point scale) of the average individual, controlling for other socio-economic and demographic traits. The incremental bars are the additional positive effective that an incremental unit of income or education has for those individuals who report having experienced stress yesterday compared to those who do not.

0.1 0.3

• 0.9

0.1 0.1 0.2 0.4 (1.0) (0.8) (0.6) (0.4) (0.2) 0.0 0.2 0.4 0.6 Education Income Stress Base Incremental Percent of Respondents Experiencing Stress On Prior Day

U.S Latin American Countries (L.A.C.)

6 p.p. 4 p.p. Contribution of Incremental Education, Income, and Happiness to Life Satisfaction (on a 10 Point Scale) 2.8 2.5 1.9 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Poor Black Relative to Poor White Poor Black Relative to Middle-Income White Poor Black Relative to Rich White

Relative Odds Ratio

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Options for Addressing Growing Gradient Within Entitlement Programs

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Progressivity of Policy Options for Improving the Solvency of Social Security and Medicare: Effect on Present Value of Benefits Relative to Consumption for Top and Bottom Quintiles on Average Indexed Monthly Earnings

Policy Experiment Impact on Progressivity Impact on Present Value of Net Benefits Relative to Wealth for Bottom/Top Quintiles for Males Impact on Solvency

Raise EEA from age 62 to 64 Somewhat less progressive +0.1 +0.4 Small Raise NRA to age 70 Somewhat more progressive (4.8) (5.2) Significant (23% reduction in present value benefits for males; 15% reduction for females) Raise EEA and NRA as above Somewhat more progressive (4.8) (5.1) Significant (22% reduction in present value benefits for males; 14% reduction for females) COLA based on chained CPI Somewhat more progressive (0.4) (0.6) Small (reduces benefits by less than 2%) Marginal benefit 10% at top Somewhat more progressive (0.1) (0.3) Small (reduces benefits by less than 1%) Marginal benefit after median Substantially more progressive (1.1) (3.4) Medium (11% reduction in benefits for males; 5% for females) Raise Medicare eligibility to age 67 Less progressive (1.4) (0.5) Modest (in part because 65- and 66- year olds are much less expensive than older beneficiaries, and in part because some would quality through disability insurance)

Source: Committee generated using Health and Retirement Study data and cohort assumptions. Note: COLA = cost-of-living adjustment, CPI = consumer price index, EEA = early entitlement age, NRA = normal retirement age.

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Enrollment Dynamics and Selection Effects in Annuities

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39% 30% 6% 16% 9% 0% 10% 20% 30% 40% 50% Amount Left in Account IRA Rollover Annuitization With- drawal Other Dispositions of DC Pensions by Retiring Workers Share of Workers

Source: GAO (2011); Health and Retirement Study; Social Security Administration; and Mitchell, Poterba, Warshawsky, and Brown (1999). Note: Money’s worth computation based on male mortality at given ages.

After-Tax Money’s Worth of U.S. Nominal Annuity Payouts Money’s Worth (1995) Beneficiary Age 85% 81% 78% 93% 93% 91% 70% 75% 80% 85% 90% 95% 55 65 75 General Population Annuitant Population Observations

• Annuitization uptake has remained low, even as life expectancy continues to rise

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Average male Social Security beneficiary at age 65 has a nearly 20 percent chance of living until 90, up from ~15% a decade ago

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Low annuity uptake has exposed workers to substantial longevity risk

• Evidence from U.S. and U.K. annuities markets suggest that selection effects “price out” many workers

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Present value of annuities for the general population can be substantially below actuarially fair values

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Adverse selection drives up the price of annuities, driving down general enrollment 8

Long-Run, Secular Decline in Life Insurance Enrollment

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46% 54% 53% 52% 52% 49% 46% 72% 65% 62% 55% 50% 50% 44% 44% 83% 83% 81% 78% 76% 78% 70% 70% 40% 50% 60% 70% 80% 90% 1960 1976 1984 1992 1998 2004 2010 2016 % U.S. Households Owning Life Insurance Owns Group Life Owns Individual Life Owns Any Life Trends in Life Insurance Ownership Rate, 1960-2016

Source: Life Insurance Marketing and Research Association. 1 Includes Individual, Group, SGLI & VGLI. 1

Trends in life insurance uptake do not corroborate the bequest motive explanation of the “annuity puzzle”

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Decline in Life Insurance Exhibited Across Education and Income Strata

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64% 76% 78% 88% 35% 55% 60% 73% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Less Than a High School Diploma High School Diploma Some College College Degree 1989 2013

Absolute Decrease in Life Insurance Enrollment Between 1989 and 2013, by Education Group

Source: Federal Reserve Bank of Chicago.

Decrease in Life Insurance Enrollment (p.p.)

29 p.p. 21 p.p. 18 p.p. 15 p.p.

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