John Turner, Pension Policy Center
In the United States, poverty rates for seniors increase at older ages. The rates are higher for persons age 75 and older than for persons age 65 to 74. Poverty rates increase at older ages because relatively more people fall into poverty as they age than exit poverty due to death. Persons who live longer may fall into poverty because of various life events — their spouse dies, they have higher medical or long-term care expenses than expected, or their investment returns are worse than projected. As Americans live longer, they face an increased risk of outliving their savings.
This outcome of poverty rates increasing at older ages is not inevitable. In Ireland and Poland, poverty rates actually decrease for those age 75 and older compared to those age 65 to 74. The explanation for lower poverty rates at older ages is a low-cost targeted policy intervention called a longevity insurance benefit. A longevity insurance benefit is a benefit that starts at an advanced age, such as age 82. Both Ireland and Poland provide such a benefit for their oldest citizens.
In January 1940, when regular on-going monthly Social Security benefits were first distributed Social Security was a longevity insurance benefit, though it was not called that. The retirement age of 65 was chosen taking into account that providing such a benefit would not be expensive because not so many people survived to that age at that time in the United States. Roughly half of male workers born 65 years earlier were still alive in 1940. Thus, the idea of a longevity insurance benefit provided by Social Security is not a new idea. It is an innovation from the past.
If Social Security reinstituted this type of benefit, it would be desirable not only because it is consistent with the original intent of the program of providing longevity insurance, but also because the private sector is unlikely to provide it. These benefits are rarely provided by 401(k) plans.
A longevity insurance benefit as part of Social Security would be particularly desirable as part of a reform package to restore solvency if the package also included a reduction of benefits, such as raising the Normal Retirement Age. The longevity insurance benefit would reduce or eliminate the adverse effects of such a cut on the most vulnerable age group. A simple form of such a benefit would be to exempt persons age 82 and older from any benefit cuts.
A longevity insurance benefit would provide valuable insurance to America’s oldest old while at the same time being relatively inexpensive for Social Security to provide because of the advanced age at which the benefit is received. For example, such a benefit in the Save Our Social Security Act of 2016 would increase Social Security’s actuarial deficit by 0.17 percent of taxable payroll.
As President Franklin Roosevelt stated when signing the Social Security Act on August 14, 1935:
“We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”
Adding a low-cost longevity insurance benefit to Social Security would help ensure that older Americans lived out their final years in dignity rather than in poverty.
