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

A P R I L 2 0 1 8 I N E Q U A L I T Y A N D R E T I R E M E N T Inequality and Retirement Peter R. Orszag Vice Chairman of Investment Banking Lazard OECD April 2018

I N E Q U A L I T Y A N D R E T I R E M E N T Average Life Expectancy Has Been Increasing… Life Expectancy at Birth, 1980-2015 Additional Life Expectancy by Age, 1980 and 2012 Years Years 80 35 32 79 30 28 27 78 25 24 23 77 20 19 20 76 16 16 75 15 13 12 74 10 9 10 8 73 7 6 5 72 71 0 1980 1985 1990 1995 2000 2005 2010 2015 50 55 60 65 70 75 80 85 1980 2012 Year Age 1 Source: Centers for Disease Control and Prevention. Note: Estimates shown are for the entire population cross-section (i.e. both sexes and all races).

I N E Q U A L I T Y A N D R E T I R E M E N T …But Almost Entirely Because of Gains to Higher Earners The gradient in life expectancy by income and education has grown much steeper over the past few decades Since 1980, Life Expectancy for Men at Age 50 Has Life Expectancy for the Highest-Earning 1% of Men Is Diverged for the Top and Bottom Income Quintiles Now ~15 Years Longer Than for the Lowest-Earning 1% Years of Life Expectancy Years of Life Expectancy 1 40 90 88 35 86 30 84 25 82 20 80 78 15 76 10 74 5 72 0 70 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 1 11 21 31 41 51 61 71 81 91 Household Income Percentile 1980 2010 2 Source: Auerbach et al. (2017) and Chetty et al. (2016). 1 Life expectancy data from men at age 40, computed on a lifetime basis.

I N E Q U A L I T Y A N D R E T I R E M E N T As a Result, Our Entitlement Programs Are Becoming Less Progressive on a Lifetime Basis… Present Value of Entitlement Benefits 1 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 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.

I N E Q U A L I T Y A N D R E T I R E M E N T Life Expectancy at Birth Across Poverty Percentiles Men Women 85 85 80 80 Life Expectancy at Birth Life Expectancy at Birth 75 75 70 70 65 65 0 20 40 60 80 100 0 20 40 60 80 100 Poverty rank of county group Poverty rank of county group 1990 2000 2010 4 Source: Currie and Schwandt (2016).

I N E Q U A L I T Y A N D R E T I R E M E N T 3-Year Mortality Rates Across Groups of Counties Ranked by Their Poverty Rate Age 0 – 4 Age 5 – 19 Females Males Females Males Females Males 5 5 3 3 3 Yr. Mortality (per 1,000) 3 Yr. Mortality (per 1,000) 4 4 2 2 3 3 1 1 2 2 1 1 0 0 0 20 40 60 80 100 0 20 40 60 80 100 0 20 40 60 80 100 0 20 40 60 80 100 Poverty rank of county group Poverty rank of county group Age 20 – 40 Age 50+ Females Males Females Males 15 15 120 120 3 Yr. Mortality (per 1,000) 3 Yr. Mortality (per 1,000) 10 10 100 100 5 5 80 80 0 0 60 60 0 20 40 60 80 100 0 20 40 60 80 100 0 20 40 60 80 100 0 20 40 60 80 100 Poverty rank of county group Poverty rank of county group 1990 2000 2010 5 Source: Currie and Schwandt (2016).

I N E Q U A L I T Y A N D R E T I R E M E N T Striking Differences in Stress and Optimism Across Demographic and Socioeconomic Groups Could Help Explain Differential Trends in Life Expectancy Stress Inequality Across the Income Distribution in the US and LACs Odds of Being on a Higher Level of Optimism, by Income and Race Relative Odds Ratio Percent of Respondents Experiencing Stress On Prior Day 50% 48% 50% 46% 3.0 2.8 43% 45% 6 p.p. 42% 40% 34% 34% 2.5 35% 32% 32% 2.5 4 p.p. 30% 30% 25% 2.0 20% 1.9 1 Poorest 2 Second 3 Middle 4 Fourth 5 Richest U.S Latin American Countries (L.A.C.) Within-Country Household Income Quintile 1.5 Impact of Stress on Life Satisfaction Exceeds That of Money, School 1 Education 0.1 0.1 0.2 1.0 Income 0.3 0.1 0.4 0.5 Stress -0.9 (1.0) (0.8) (0.6) (0.4) (0.2) 0.0 0.2 0.4 0.6 0.0 Base Incremental Poor Black Relative Poor Black Relative Poor Black Relative Contribution of Incremental Education, Income, and to Poor White to Middle-Income White to Rich White Happiness to Life Satisfaction (on a 10 Point Scale) 6 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.

I N E Q U A L I T Y A N D R E T I R E M E N T Options for Addressing Growing Gradient Within Entitlement Programs 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 Impact on Present Value of Net Policy Experiment Impact on Progressivity Benefits Relative to Wealth for Impact on Solvency Bottom/Top Quintiles for Males +0.1 Raise EEA from age 62 to 64 Somewhat less progressive Small +0.4 Significant (23% reduction in present (4.8) Raise NRA to age 70 Somewhat more progressive value benefits for males; 15% (5.2) reduction for females) Significant (22% reduction in present (4.8) Raise EEA and NRA as above Somewhat more progressive value benefits for males; 14% (5.1) reduction for females) (0.4) Small (reduces benefits by less than COLA based on chained CPI Somewhat more progressive 2%) (0.6) (0.1) Small (reduces benefits by less than Marginal benefit 10% at top Somewhat more progressive 1%) (0.3) (1.1) Medium (11% reduction in benefits for Marginal benefit after median Substantially more progressive males; 5% for females) (3.4) Modest (in part because 65- and 66- year olds are much less expensive (1.4) Raise Medicare eligibility to age 67 Less progressive than older beneficiaries, and in part (0.5) because some would quality through disability insurance) 7 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.

I N E Q U A L I T Y A N D R E T I R E M E N T Enrollment Dynamics and Selection Effects in Annuities After- Tax Money’s Worth of U.S. Nominal Annuity Payouts Dispositions of DC Pensions by Retiring Workers Share of Workers Money’s Worth (1995) 93% 50% 95% 93% 91% 39% 90% 40% 85% 30% 85% 30% 81% 78% 80% 20% 16% 75% 9% 10% 6% 70% 55 65 75 0% Amount Left IRA Annuitization With- Other General Population Annuitant Population in Account Rollover drawal Beneficiary Age Observations • Annuitization uptake has remained low, even as life expectancy continues to rise  Average male Social Security beneficiary at age 65 has a nearly 20 percent chance of living until 90, up from ~15% a decade ago  Low annuity uptake has exposed workers to substantial longevity risk • Evidence from U.S. and U.K. annuities markets suggest that s election effects “price out” many workers  Present value of annuities for the general population can be substantially below actuarially fair values  Adverse selection drives up the price of annuities, driving down general enrollment 8 Source: GAO (2011); Health and Retirement Study; Social Security Administration; and Mitchell, Poterba, Warshawsky, and Brown (1999). Money’s worth computation based on male mortality at given ages. Note:

I N E Q U A L I T Y A N D R E T I R E M E N T Long-Run, Secular Decline in Life Insurance Enrollment Trends in life insurance uptake do not corroborate the bequest motive explanation of the “annuity puzzle” Trends in Life Insurance Ownership Rate, 1960-2016 % U.S. Households Owning Life Insurance 90% 83% 83% 81% 78% 78% 80% 76% 72% 70% 70% 70% 65% 62% 60% 55% 52% 52% 49% 54% 50% 53% 46% 50% 50% 46% 44% 44% 40% 1960 1976 1984 1992 1998 2004 2010 2016 Owns Group Life Owns Individual Life Owns Any Life 1 9 Source: Life Insurance Marketing and Research Association . 1 Includes Individual, Group, SGLI & VGLI.

I N E Q U A L I T Y A N D R E T I R E M E N T Decline in Life Insurance Exhibited Across Education and Income Strata Absolute Decrease in Life Insurance Enrollment Between 1989 and 2013, by Education Group Decrease in Life Insurance Enrollment (p.p.) 100% 88% 90% 15 p.p. 78% 80% 76% 73% 18 p.p. 70% 21 p.p. 64% 60% 60% 55% 29 p.p. 50% 40% 35% 30% 20% 10% 0% Less Than a High School Diploma High School Diploma Some College College Degree 1989 2013 10 Source: Federal Reserve Bank of Chicago.