Arnold Kling  

Lifespan Calculations

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Guest Blogger... Malpractice Reform...

In this essay, I discuss the esoteric but important topic of longevity calculations.


How do we calculate the longevity of a person born in, say, 1950? The analogy would be to look at how many people born that year died in 1950, 1970, 1990, 2010, 2030 and 2050. The problem is that we only have actual data for the first three of those time periods. The reality is that we do not know the lifespan of people born in 1950, much less the lifespans of people born much more recently

UPDATE: Another article on fundamental determinants of Social Security's viability was provided by Roger Lowenstein in the New York Times. Unfortunately, he buys into the analogy between Social Security and a pension plan, in that he focuses on the state of the "trust fund" as an indicator of Social Security's condition.


For Discussion. What information would you want to have in order to estimate longevity for people born in 1950 or in 1970?


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COMMENTS (12 to date)
Boonton writes:

It's an interesting article but I wonder if you looked at how the insurance industry estimates lifespan? If they use a similar method then either:

1. The method used by SS & insurance companies is relatively accurate.

2. Insurance companies (especially ones that sell annuities) are facing a serious problem because their underlying models are wildly inaccurate.

the implications for social security are not as great IMO. No one is likely to invent an 'immortality pill' overnight therefore increasing lifespans should be gradual allowing ample time to adjust the retirement age upwards.

dsquared writes:

Arnold, you say:

Switching to a defined-contribution structure would greatly reduce the risk of a meltdown

How does this square with your post immediately above on Posner's view of malpractice costs? Unless defined contribution pensions kill people, they can't alter the risk of longevity shocks. All they can do is alter the incidence of that risk, insuring that instead of being spread across the population it is borne on an individual basis by those individuals who happen to live too long for their savings.

In what other contexts do we say that we have "reduced" a risk by drastically shrinking the risk pool? I can't think of any.

Arnold Kling writes:

We need to distinguish two risks. One risk is that the government makes a bad forecast of aggregate longevity. We are less subject to that risk if we take care of our retirement as individuals rather than collectively.

The other risk is that as individuals we live to a different age than what we expect. I don't know whether that risk has gone up or not. To the extent that it has gone up, there may be a greater need for annuities, which would increase the benefit of a sound Social Security system.

My focus is on the first risk--government making a forecast of longevity that understates its obligations under current formulas.

Lawrance George Lux writes:

Arnold,
Your article is going to be the focus tomorrow of a Post on my blog. I hope you will read it, and enjoy. It is a Counterpoint piece, but I hope I have treated you fairly. lgl

Boonton writes:

What's interesting about SS is that for the individual there is 0 risk of underestimating their lifespan. If they live to 120 they will collect checks up to their deaths. With a 401K the individual always has to set aside a little extra in case they have to stretch it longer. Unless you're on death row or have been diagnosed with a terminal disease you'll never really know how much longer you have.

We may need more annuities but annuities bring their own risk. The company offering annuities must be able to accurately forecast how long they will need to make payments. If they overestimate lifespans they will overcharge because they will feel they need more assets than they really do. If they underestimate they run the risk of bankruptcy & the need for taxpayer bailout.

Edge writes:

I believe, historically, SSA has come quite close on aggregate demographics for life expectancy. Do you have evidence to the contrary?

Tangentially related; a letter to the editor in today's WaPo suggests that black men who survive past youth don't have demographics all that much different from white men.

http://www.washingtonpost.com/wp-dyn/articles/A16731-2005Jan17.html

Brad Hutchings writes:

Ms. De Long (in her WaPost letter) makes an excellent case for exempting black men in their 20s from FICA withholding. She also makes an excellent case for black men receiving a "bonus" in their Social Security checks. To be completely fair though, men in general should get a bonus for not living as long as women. I am glad we are finally opening up this can of worms for a complete public airing.

Arnold, your question about projecting lifespan for those born in 1970... I know I speak for just about everyone born in 1970 when I say that we (self included) are going to live indefinitely. Wasn't that easy?

Boonton writes:

Aye but if Arnold is correct then we really don't know how long the current crop of young men or young black males will live. Also, if life expectancy for black males who survived childhood is nearly the same as for whites then there is no disparity as far as SS is concerned. Black males who die before 20 are not touched by SS except for a handful of working years at the end of their teens.

spencer writes:

I will have to look at the letter you are refering to on blacks and SS. The meme that floats around that blacks get a bad deal is incorrect and the SS adminstration has published data to show it. Yes, blacks have a shorter life span. But that is more than offset by 3 factors. One, SS payments are skewed to provide higher returns to low income receipents. Two, because blacks have shorter life spans they also collect more from SS survivor benefits and third, because they work more in manual labor jobs they also collect more in disability -- about a third of total ss payments are survivor and disability payments.

Cosnequently, blacks actually get a better deal from SS then whites.

In the NY times magazine article yesterday the author points out that the original estimates by the SS actuaries in the 1930s of what life span would be in 1980 was within a half a year of the correct estimate. Unless you make some heroic assumptions that some miracle life saving treatments for those already old is developed very soon there is no reason to suspect that the SS estimates of life expectency are off. If anything, they may be too optimistic.

Jim Erlandson writes:

Or, if we believe this article in Technology Review (from MIT, no less), we may all live forever. In which case, the only way to save Social Security would be to outlaw seatbelts.

Boonton writes:

Heh, so there's a pending crises because immortality may soon be around the corner. Remember how we laughed at the guy in the history books who risked his life exploring Flordia's swamps looking for the Fountain of Youth???

dsquared writes:

Ms. De Long (in her WaPost letter) makes an excellent case for exempting black men in their 20s from FICA withholding. She also makes an excellent case for black men receiving a "bonus" in their Social Security checks.

I suspect they might prefer it if something was done about their life expectancy.

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