The Value of Health and Longevity

We develop an economic framework for valuing improvements to health and life expectancy, based on individuals' willingness to pay. We then apply the framework to past and prospective reductions in mortality risks, both overall and for specific life-threatening diseases. We calculate (i) the social values of increased longevity for men and women over the 20th century; (ii) the social value of progress against various diseases after 1970; and (iii) the social value of potential future progress against various major categories of disease. The historical gains from increased longevity have been enormous. Over the 20th century, cumulative gains in life expectancy were worth over $1.2 million per person for both men and women. Between 1970 and 2000 increased longevity added about$3.2 trillion per year to national wealth, an uncounted value equal to about half of average annual GDP over the period. Reduced mortality from heart disease alone has increased the value of life by about $1.5 trillion per year since 1970. The potential gains from future innovations in health care are also extremely large. Even a modest 1 percent reduction in cancer mortality would be worth nearly$500 billion.

What Replacement Rates Should Households Use?

Common financial planning advice calls for households to ensure that retirement income exceeds 70 percent of average pre-retirement income. We use an augmented life-cycle model of household behavior to examine optimal replacement rates for a representative set of retired American households. We relate optimal replacement rates to observable household characteristics and in doing so, make progress in developing a set of theory-based, but readily understandable financial guidelines. Our work should be a useful building block for efforts to assess the adequacy of retirement wealth preparation and efforts to promote financial literacy and well-being.

International Differences in Longevity and Health and Their Economic Consequences

In 1975, 50 year-old Americans could expect to live slightly longer than their European counterparts. By 2005, American life expectancy at that age has diverged substantially compared to Europe. We find that this growing longevity gap is primarily the symptom of real declines in the health of near-elderly Americans, relative to their European peers. In particular, we use a microsimulation approach to project what US longevity would look like, if US health trends approximated those in Europe. We find that differences in health can explain most of the growing gap in remaining life expectancy. In addition, we quantify the public finance consequences of this deterioration in health. The model predicts that gradually moving American cohorts to the health status enjoyed by Europeans could save up to $1.1 trillion in discounted total health expenditures from 2004 to 2050.disability, mortality, international comparisons, microsimulation

International Differences in Longevity and Health and their Economic Consequences

In 1975, 50 year-old Americans could expect to live slightly longer than their European counterparts. By 2005, American life expectancy at that age has diverged substantially compared to Europe. We find that this growing longevity gap is primarily the symptom of real declines in the health of near-elderly Americans, relative to their European peers. In particular, we use a microsimulation approach to project what US longevity would look like, if US health trends approximated those in Europe. We find that differences in health can explain most of the growing gap in remaining life expectancy. In addition, we quantify the public finance consequences of this deterioration in health. The model predicts that gradually moving American cohorts to the health status enjoyed by Europeans could save up to $1.1 trillion in discounted total health expenditures from 2004 to 2050.disability, mortality, international comparisons, microsimulation

Social Security's treatment of postwar generations

Social Security's tax treatment of distinct groups varies widely among postwar generations: Women, whites, and the college educated have lower lifetime net tax rates than do men, non-whites, and those without a college education. Among income groups, the middle class faces the highest lifetime net tax rateSocial security

"Napsterizing" Pharmaceuticals: Access, Innovation, and Consumer Welfare

We analyze the effects on consumers of an extreme policy experiment -- Napsterizing' pharmaceuticals -- whereby all patent rights on branded prescription drugs are eliminated for both existing and future prescription drugs without compensation to the patent holders. The question of whether this policy maximizes consumer welfare cannot be resolved on an a priori basis due to an obvious tradeoff: While accelerating generic entry will yield substantial gains in consumer surplus associated with greater access to the current stock of pharmaceuticals, future consumers will be harmed by reducing the flow of new pharmaceuticals to the market. Our estimates of the consumer surpluses at stake are based on the stylized facts concerning how generic entry has affected prices, outputs, and market shares. We find that providing greater access to the current stock of prescription drugs yields large benefits to existing consumers. However, realizing those benefits has a substantially greater cost in terms of lost consumer benefits from reductions in the flow of new drugs. Specifically, the model yields the result that for every dollar in consumer benefit realized from providing greater access to the current stock, future consumers would be harmed at a rate of three dollars in present value terms from reduced future innovation. We obtain this result even accounting for the stylized fact that after generic entry branded drugs continue to earn significant price premia over generic products and hence recognizing that Napsterizing does not completely eliminate the incentives to innovate.

The Growing Gap in Life Expectancy by Income: Recent Evidence and Implications for the Social Security Retirement Age

[Excerpt] This report provides a brief overview of the concept of life expectancy, how it is measured, and how it has changed over time in the United States. While life expectancy may be studied in a variety of contexts, this report focuses on the link between life expectancy and SES, as measured by lifetime income. In particular, this report synthesizes recent research on (1) the life expectancy gap by income and (2) the relationship between this gap and Social Security benefits. Finally, this report discusses the implications of this research for one type of Social Security reform proposal: increasing the Social Security retirement age