Differential Mortality by Income and Social Security Progressivity

Abstract

There is a widespread belief that people with low lifetime labor income have higher age specific mortality and lower remaining life expectancies at age 60 or 65 than those with middle or high lifetime earnings. In this paper, we assess the implications of differential mortality by lifetime income for Social Security progressivity. Social Security has a highly progressive formula to determine monthly benefits in that those with low lifetime earnings get a much higher replacement rate than those with high lifetime earnings. However, recent studies on the mortality gap by lifetime income suggest that at least some of this progressivity is counterbalanced by the longer average lifetimes experienced by higher lifetime income recipients of Social Security. To reassess the progressivity of Social Security, we calculate internal rates of return and net present values for the program under assumptions of differential mortality and compare these measures of progressivity to the same measures calculated assuming all individuals experience average population mortality rates. Under the assumption of constant mortality across lifetime income subgroups, the Social Security system is progressive regardless of the measure shown. However, a good deal of the progressivity is undone or even reversed when differential mortality is taken into account.Social Security, Mortality Gap, Differential Mortality, Lifetime Income