RETIREMENT
SECURITY
Shorter Life
Expectancy Reduces
Projected Lifetime
Benefits for Lower
Earners
Report to the Ranking Member,
Subcommittee on Primary Health and
Retirement Security, Committee on
Health, Education, Labor, and Pensions,
U.S. Senate
March 2016
GAO-16-354
United States Government Accountability Office
Highlights of GAO-16-354, a report to the
Ranking Member, Subcommittee on Primary
Health and
Retirement Security,
Committee on
Health, Education, Labor, and Pensions, U
.S.
Senate
March 2016
RETIREMENT SECURITY
Shorter Life Expectancy Re
duces Projected Lifetime
Benefits
for Lower Earners
Why GAO Did This Study
An increase in average life expectancy
for individuals in the United States is a
positive development, but also requires
more planning and saving to support
longer retirements. At the same time,
as life expectancy has not increased
uniformly across all income groups,
proposed actions to address the
effects of longevity on programs and
plan sponsors may impact lower-
income and higher-income individuals
differently. GAO was asked to examine
disparities in life expectancy and the
implications for retirement security.
In this report, GAO examined (1) the
implications of increasing life
expectancy for retirement planning,
and (2) the effect of life expectancy on
the retirement resources for different
groups, especially those with low
incomes. GAO reviewed studies on life
expectancy for individuals approaching
retirement, relevant agency
documents, and other publications;
developed hypothetical scenarios to
illustrate the effects of differences in
life expectancy on projected lifetime
Social Security retirement benefits for
lower-income and higher-income
groups based on analyses of U.S.
Census Bureau and Social Security
Administration (SSA) data; and
interviewed SSA officials and various
retirement experts.
GAO is making no recommendations in
this report. In its comments, SSA
agreed with our finding that it is
important to understand how the life
expectancy in different income groups
may affect retirement income.
What GAO Found
The increase in average life expectancy for older adults in the United States
contributes to challenges for retirement planning by the government, employers,
and individuals. Social Security retirement benefits and traditional defined benefit
(DB) pension plans, both key sources of retirement income that promise lifetime
benefits, are now required to make payments to retirees for an increasing
number of years. This development, among others, has prompted a wide range
of possible actions to help curb the rising future liabilities for the federal
government and DB sponsors. For example, to address financial challenges for
the Social Security program, various options have been proposed, such as
adjusting tax contributions, retirement age, and benefit amounts. Individuals also
face challenges resulting from increases in life expectancy because they must
save more to provide for the possibility of a longer retirement.
Life expectancy varies substantially across different groups with significant
effects on retirement resources, especially for those with low incomes. For
example, according to studies GAO reviewed, lower-income men approaching
retirement live, on average, 3.6 to 12.7 fewer years than higher-income men.
GAO developed hypothetical scenarios to calculate the projected amount of
lifetime Social Security retirement benefits received, on average, for men with
different income levels born in the same year. In these scenarios, GAO
compared projected benefits based on each income groups’ shorter or longer life
expectancy with projected benefits based on average life expectancy, and found
that lower-income groups’ shorter-than-average life expectancy reduced their
projected lifetime benefits by as much as 11 to 14 percent. Effects on Social
Security retirement benefits are particularly important to lower-income groups
because Social Security is their primary source of retirement income.
Disparities in Life Expectancy Affect Lifetime Social Security Retirement Benefits
Social Security’s formula for calculating monthly benefits is progressive—that is,
it provides a proportionally larger monthly earnings replacement for lower-
earners than for higher-earners. However, when viewed in terms of benefit
received over a lifetime, the disparities in life expectancy across income groups
erode the progressive effect of the program.
View GAO-16-354. For more information,
contact
Charles Jeszeck at (202) 512-7215 or
jeszeckc@gao.gov
.
Page i GAO-16-354 Longevity and Retirement
Letter 1
Background 3
Increasing Life Expectancy Adds to Challenges for Retirement
Planning 10
Life Expectancy Disparities Negatively Affect Retirement
Resources for Lower-Income Groups 21
Agency Comments 39
Appendix I List of Selected Studies on Life Expectancy Differences, by Income 41
Appendix II Scenario Calculation Methodology and Additional Examples 43
Appendix III Trend in the Cap on Social Security Taxable Earnings 50
Appendix IV Comments from the Social Security Administration 52
Appendix V GAO Contact and Staff Acknowledgments 53
Related GAO Products 54
Tables
Table 1: Selected Proposals to Adjust the Social Security
Retirement Program and the Projected Effect on Social
Security’s Combined Old-Age and Survivors Insurance
and Disability Insurance Trust Funds 14
Table 2: Retirement Savings Held by Households Headed by
Individuals near or in Retirement, 2013 18
Table 3: Selected Studies’ Projected Life Expectancy over Time
for Men Approaching Retirement, by Income Group 23
Table 4: Selected Studies on Life Expectancy Differences, by
Income 41
Contents
Page ii GAO-16-354 Longevity and Retirement
Figures
Figure 1: Trends in Number of Private Sector Defined Benefit and
Defined Contribution Plans, 1975-2013 9
Figure 2: Trend in the Annual Net Cash Flow of Social Security’s
Combined Old-Age and Survivors Insurance and
Disability Insurance Trust Funds, 1980 through 2025
(projected) 12
Figure 3: Differences in Projected Years Remaining for Men, by
Income Group 25
Figure 4: Shorter Life Expectancy Leads to Reduced Projected
Lifetime Social Security Retirement Benefits for Lower-
Income Men 30
Figure 5: Longer Life Expectancy Leads to More Projected
Lifetime Social Security Retirement Benefits for Higher-
Income Men 32
Figure 6: Shorter Life Expectancy Leads to Proportionally Less
Lifetime Social Security Retirement Benefits for
Hypothetical Lower-Income Men 34
Figure 7: Present Value Adjusted Lifetime Social Security
Retirement Benefits 47
for Lower-Income Men 47
Figure 8: Present Value Adjusted Lifetime Social Security
Retirement Benefits for Higher-Income Men 48
Figure 9: Change in Present Value Adjusted Lifetime Social
Security Retirement Benefits 49
Figure 10: Percentage of Covered Earnings Subject to the Social
Security Payroll Tax, 1975-2013 51
Page iii GAO-16-354 Longevity and Retirement
Abbreviations
AIME average indexed monthly earnings
CBO Congressional Budget Office
CDC Centers for Disease Control and Prevention
Census U.S. Census Bureau
DB defined benefit
DC defined contribution
DI Disability Insurance
ERISA Employee Retirement Income Security Act of 1974
IRA individual retirement account
IRS Internal Revenue Service
OCACT Office of the Chief Actuary
OASI Old-Age and Survivors Insurance
PBGC Pension Benefit Guaranty Corporation
SSA Social Security Administration
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Page 1 GAO-16-354 Longevity and Retirement
441 G St. N.W.
Washington, DC 20548
March 25, 2016
The Honorable Bernard Sanders
Ranking Member
Subcommittee on Primary Health and Retirement Security
Committee on Health, Education, Labor, and Pensions
United States Senate
Dear Senator Sanders:
The increase in average national life expectancy over the past several
decades is a positive development, but also requires more planning and
saving to support longer retirements with effects on the government,
employers, and individuals. However, life expectancy has not increased
uniformly across all income groups. People who have lower incomes, for
example, can expect to have shorter lives, on average, compared to
those with higher incomes. As a result, some proposed actions to address
the fiscal effects of longevity on retirement programs and plan sponsors
may impact lower-income and higher-income individuals differently. In
light of this situation, you asked us to examine disparities in life
expectancy and the implications for our nation’s policies with respect to
retirement security. This report provides information on the following:
1. The implications of increasing life expectancy for retirement planning.
2. The effect of life expectancy on the retirement resources for different
groups, especially those with low incomes.
To explore the implications of increasing life expectancy for retirement
planning, we reviewed existing publications, including federal agency
documentation and studies on life expectancy for individuals around
retirement age conducted by various researchers and federal agencies.
We also interviewed agency officials and retirement experts, including
researchers and academics we identified through our review of longevity
studies and through expert referral. In addition, to examine the effect of
life expectancy on the retirement resources for different groups,
especially those with lower incomes, we developed scenarios to illustrate
how disparities in average life expectancy by income group can affect the
Letter
Page 2 GAO-16-354 Longevity and Retirement
average amount of lifetime Social Security retirement benefits received by
different income groups.
1
To determine our scenario assumptions, we
reviewed relevant longevity studies.
2
For our life expectancy estimates,
we relied primarily on a 2007 Social Security Administration (SSA) study
by Hilary Waldron.
3
To inform the income groupings in our scenarios
(based on the 25th and 75th individual income percentiles), we analyzed
2015 data from the U.S. Census Bureau’s (Census) Current Population
Survey. We obtained estimated monthly Social Security benefits using
SSA’s quick calculator,
4
and we estimated average lifetime Social
Security benefits by applying life expectancy estimates from SSA and
Waldron. While our report discusses various forms of retirement
resources, for our scenarios we compare only lifetime Social Security
retirement benefits against current income. We do not factor in other
retirement resources, which could include, but are not limited to, future
payments from employer-sponsored defined benefit plans, retirement
savings accounts, or housing equity. (For details on the methodology for
our scenarios, see appendix II.) We assessed the reliability of the data we
used in our scenarios by reviewing relevant documentation and
interviewing knowledgeable agency officials. We found the data to be
reliable for the purposes used in this report.
We conducted this performance audit from December 2014 to March
2016 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.
1
Social Security retirement benefits are based on covered earnings from work (such as
wages and salaries). Earnings from work generally make up the bulk of income prior to
retirement. For our purposes, we grouped our scenarios by individual income rather than
earnings.
2
See appendix I for the list of relevant studies we reviewed.
3
Hilary Waldron, “Trends in Mortality Differentials and Life Expectancy for Male Social
Security-Covered Workers, by Socioeconomic Status,” Social Security Bulletin, vol. 67,
no. 3 (2007).
4
http://www.ssa.gov/oact/quickcalc/, accessed December 10, 2015.
Page 3 GAO-16-354 Longevity and Retirement
Because Americans are, on average, living longer and having fewer
children, the average age of the population is rising and that trend is
expected to continue. As of 2015, people age 65 and over accounted for
15 percent of the population, but by 2045 they are expected to comprise
more than 20 percent of the population.
5
Life expectancy is the average estimated number of years of life for a
particular demographic or group of people at a given age.
6
Life
expectancy can be expressed in two different ways: (1) as the average
number of years of life remaining for a group, or (2) as the average age at
death for a group. Life span for a particular individual within a group may
fall above or below this average. Researchers use a variety of statistical
methods and assumptions in making their estimates, such as how
longevity trends are expected to change in the future. Researchers also
may use different data sources to develop life expectancy estimates. For
example, some may use death data maintained by SSA, while others may
use Centers for Disease Control and Prevention (CDC) mortality data or
Census data.
7
5
Based on the 2015 Social Security Trustees’ Report (intermediate assumptions).
6
Life expectancy is an average for the given group, and it can be actuarially calculated
from an underlying “mortality table,” which typically consists of a “mortality rate”—the
estimated probability of death within one year at a given age—for each age. Mortality
rates can be used to estimate the number of individuals who will live to various ages: in a
typical group, individuals can be expected to live to different ages, some dying prior to life
expectancy and some living beyond life expectancy. The exact proportion of individuals
who fall short of or exceed their life expectancy is generally not 50/50, because life
expectancy is a mean, not a median. While life expectancy and mortality are related
concepts, throughout this report we discuss life expectancy because it is more relevant to
individuals’ retirement planning than the probability that they may die in a particular year.
7
SSA maintains death data—including names, Social Security numbers, dates of birth,
and dates of death—for millions of deceased Social Security number-holders. SSA
receives death reports from a variety of sources, including states, family members, funeral
directors, post offices, financial institutions, and other federal agencies. SSA shares its full
set of death data with certain agencies that pay federally-funded benefits, for the purpose
of ensuring the accuracy of those payments. For other users of SSA’s death data, SSA
extracts a subset of records, which, to comply with the Social Security Act, excludes state-
reported death data. See 42 U.S.C. § 405(r). SSA makes this subset available via the
Department of Commerce’s National Technical Information Service, from which any
member of the public can purchase the data.
Background
Demographic Shifts and
Life Expectancy
Page 4 GAO-16-354 Longevity and Retirement
As noted, life expectancy can be estimated from different initial ages,
such as from birth or from some older age. For a given population, the
earlier the starting age, the greater the remaining years of life expectancy,
but the lower the average age at death. This is because, when projected
from birth, measures of life expectancy reflect the probability of death
over one’s entire lifetime, including from childhood infectious diseases. In
contrast, life expectancy calculated at older ages, such as age 65,
generally predicts that individuals will live to an older age than when life
expectancy is calculated at birth, since the averages for older persons do
not include those who have died before that age. As a result, the average
age that will be reached from birth will be lower than the average age that
will be reached by those who have already reached age 65.
Studies have found various factors associated with disparities in life
expectancy. For example, women tend to live longer than men, although
that gap has been getting smaller, according to SSA data.
8
In addition,
65-year-old men could expect to live until age 79.7 in 1915, on average;
in 2015, they could expect to live until age 86.1—an increase of about 6.4
years. Meanwhile, 65-year-old women could expect to live until age 83.7
in 1915, on average; in 2015, they could expect to live until age 88.7—an
increase of about 5 years. Other factors that have been shown to be
associated with differences in life expectancy include income, race,
education, and geography. A recent study examined trends in life
expectancy at the county level from 1985 to 2010 and found increasing
disparities across counties over the 25-year period, especially in certain
areas of the country.
9
The lowest life expectancy for both men and
women was found in the South, the Mississippi basin, West Virginia,
Kentucky, and selected counties in the West and Midwest. In contrast,
substantial improvements in life expectancy were found in multiple
locations: parts of California, most of Nevada, Colorado, rural Minnesota,
Iowa, parts of the Dakotas, some Northeastern states, and parts of
8
Social Security Administration, Office of the Chief Actuary, “Life Tables for the United
States Social Security Area 1900 to 2100,” Actuarial Study number 120, SSA pub. No. 11-
11536 (August 2005).
9
Haidong Wang et al., “Left Behind: Widening Disparities for Males and Females in U.S.
County Life Expectancy, 1985-2010”; Population Health Metrics, vol. 11 no. 8 (2013). For
example, for men, the highest county life expectancy at birth steadily increased from 75.5
years in 1985 to 81.7 years in 2010, while the lowest county life expectancy remained
under 65. For women, the highest county life expectancy at birth increased from 81.1
years to 85.0 years, and the lowest county life expectancy remained around 73 years.
Page 5 GAO-16-354 Longevity and Retirement
Florida. The study found that while income, education, and economic
inequality are likely important factors, they are not the only determinants
of the increasing disparity across counties. Certain environmental factors,
such as lack of access to health care, and behaviors such as smoking,
poor diet, and lack of exercise, have also been shown to be associated
with shorter life expectancy.
10
In the United States, income in retirement may come from multiple
sources, including (1) Social Security retirement benefits, (2) payments
from employer-sponsored defined benefit (DB) plans, and (3) retirement
savings accounts, including accounts in employer-sponsored defined
contribution (DC) plans, such as 401(k) plans; and individual retirement
accounts (IRA).
11
10
Another recent study found that between 1999 and 2013, there was a marked increase
in the all-cause mortality of middle-aged white non-Hispanic men and women in the United
States, largely due to increasing death rates from drug and alcohol poisonings, suicide,
and chronic liver diseases and cirrhosis, especially among those with less education.
Anne Case and Angus Deaton, Rising morbidity and mortality in midlife among white non-
Hispanic Americans in the 21st century (Princeton, NJ: Woodrow Wilson School of Public
and International Affairs and Department of Economics, Princeton University, September
17, 2015). A subsequent study age-adjusted the mortality rates published in the Case and
Deaton paper and found that the study’s results held for women but not for men. Andrew
Gelman and Jonathan Auerbach, “Age-Aggregation Bias in Mortality Trends,” Proceedings
of the National Academy of Sciences of the United States of America, vol. 113 no. 7
(National Academy of Sciences, February 16, 2016).
11
Income in retirement may also come from other sources, such as non-retirement
savings, home equity, wages, and federal assistance programs.
The U.S. Retirement
System
Page 6 GAO-16-354 Longevity and Retirement
Social Security pays retirement benefits to eligible individuals and family
members such as their spouses and their survivors, as well as other
benefits to eligible disabled workers and their families.
12
According to
SSA, in 2014 about 39 million retired workers received Social Security
retirement benefits. Individuals are generally eligible to receive these
benefits if they meet requirements for the amount of time they have
worked in covered employment—i.e., jobs through which they have paid
Social Security taxes. This includes jobs covering about 94 percent of
U.S. workers in 2014, according to SSA.
13
Social Security retirement
benefits offer two features that offset some key risks people face in
retirement: (1) they provide a monthly stream of payments that continue
until death, so that there is no risk of outliving a person’s benefits; and (2)
they are generally adjusted annually for cost-of-living increases, so there
is less risk of inflation eroding the value of a person’s benefits.
Social Security retirement benefits are based on a worker’s earnings
history in covered employment. The formula for calculating monthly
benefits is progressive, which means that Social Security replaces a
higher percentage of monthly earnings for lower-earners than for higher-
earners. As we reported in 2015, retired workers with relatively lower
average career earnings receive monthly benefits that, on average, equal
about half of what they made while working, whereas workers with
relatively high career earnings receive benefits that equal about 30
percent of earnings.
14
In 2013, SSA reported that the program provided at
12
We use the term “Social Security retirement benefits” to refer to benefits provided under
the Old-Age and Survivors Insurance (OASI) program. While SSA administers other
programs, including Disability Insurance and Supplemental Security Income, our focus is
on retirement benefits. For more about Social Security programs, see GAO, Social
Security’s Future: Answers to Key Questions, GAO-16-75SP (Washington D.C.: October
2015). In this report, for ease of reference, we use the term “worker;” however, many
individuals may no longer be working at the time they receive benefits and others, such as
dependents and survivors of workers who contributed to Social Security, may never have
worked in covered employment.
13
According to SSA, workers excluded from coverage include certain employees of
federal, state, and local governments, certain workers with very low net earnings from self-
employment, and railroad workers. About one-fourth of public-sector employees do not
pay Social Security taxes on the earnings from their government jobs and are not entitled
to any Social Security benefits based on this work.
14
This example is based on hypothetical workers born in 1985 and retiring at age 65 in
2050. The career-average level of earnings for each hypothetical worker was based on a
percentage of Social Security’s national average wage index. The low and high earners
had earnings about 45 percent and 160 percent of the national average wage index
($21,054 and $74,859, respectively, for 2014). See GAO-16-75SP.
Social Security
Social Security Benefit Formula
Social Security retirement benefits are
generally derived from an individual’s average
indexed monthly earnings (AIME). For
retirement benefits, the AIME is based on the
worker’s highest 35 years’ earnings for which
they paid Social Security taxes, and those
earnings are indexed to changes in average
wages over the worker’s career.
For 2016, the benefit formula replaces:
• 90% of the first $856 of AIME,
• 32% of AIME over $856 and up to
$5,157, and
• 15% of AIME over $5,157.
These “bend points” are also indexed for
changes in average wages.
Source: GAO analysis of Social Security Administration
documents. | GAO-16-354
Page 7 GAO-16-354 Longevity and Retirement
least half of retirement income for 64 percent of beneficiaries age 65 or
older in 2011 and that 35 percent of beneficiaries in this age range
received 90 percent or more of their income from Social Security.
For retired workers, Social Security pays full (unreduced) benefits at the
full retirement age, which ranges from 65 to 67 depending on an
individual’s birth year. Workers can claim Social Security retirement
benefits as early as age 62, resulting in a reduced monthly benefit, or can
delay claiming after they reach full retirement age, resulting in an
increased monthly benefit until age 70 (i.e., no further increases are
provided for delayed claiming after age 70). According to SSA
documentation, the Social Security benefit formula adjusts the amount of
monthly benefits to reflect the average remaining life expectancy at each
claiming age. More specifically, benefits are adjusted up or down based
on claiming age so that, on average, the actuarial present value of a
beneficiary’s total lifetime benefits is about the same regardless of
claiming age.
15
For example, workers currently age 62 who would reach
full retirement age at 66 would receive a monthly benefit about 25 percent
lower if claiming early, at age 62, compared with the benefit that would be
paid at their full retirement age. Those delaying claiming until age 70
would receive about 32 percent more per month than their full retirement
age benefit, according to SSA.
Despite higher monthly benefits for those who delay claiming, in 2014,
age 62 was the most prevalent age to claim Social Security retirement
benefits: About 37 percent of total retired worker benefits awarded were
awarded at age 62.
16
When workers die before reaching age 62, they
may not receive any of the Social Security retirement benefits that they
would have been entitled to receive had they lived longer.
17
In cases
15
An actuarial present value takes into account both life expectancy and the time value of
money (payments sooner are worth more than payments later). For more on these
adjustment factors, see GAO-16-75SP.
16
Total benefits awarded include disability benefits that convert to retirement benefits at
the worker’s full retirement age. Calculated from the Annual Statistical Supplement to the
Social Security Bulletin, 2015, table 6.A4. The share of people claiming at age 62 varies
by birth cohort, and while age 62 remains the most prevalent claiming age, the share of
people claiming at age 62 has decreased with successive birth cohorts. See GAO,
Retirement Security: Challenges for Those Claiming Social Security Benefits Early and
New Health Coverage Options, GAO-14-311 (Washington, D.C.: Apr. 23, 2014).
17
The CDC reported that nearly 25 percent of the U.S. deaths in 2011 were among people
age 25 to 65.
Page 8 GAO-16-354 Longevity and Retirement
where a worker dies before or during retirement, there are survivors
benefits that provide widows and widowers up to 100 percent of the
deceased spouse’s benefit.
18
Defined benefit (DB) plans are generally tax-advantaged retirement plans
that typically provide a specified monthly benefit at retirement, known as
an annuity, for the lifetime of the retiree.
19
Qualified private sector DB
plans may be single-employer or multiemployer plans.
20
Single-employer
plans make up the majority of private sector DB plans (about 94 percent)
and cover the majority of private sector DB participants (75 percent of
about 41.2 million workers and retirees in 2014).
21
The amount of the
annuity provided by a DB plan is determined according to a formula
specified by the plan, and is typically based on factors such as salary,
years of service, and age at retirement. Plan sponsors generally bear the
risks associated with investing the plan’s assets and ensuring that
sufficient funds are available to pay the benefits to plan participants as
they come due.
22
As indicated in figure 1, over the past several decades
employment-based retirement plan coverage, especially in the private
sector, has shifted away from DB plans to defined contribution (DC)
18
Children meeting certain eligibility criteria, including those who are under 18 or disabled,
may also receive survivors benefits.
19
To receive tax-advantaged treatment, DB and DC plans must meet certain requirements
specified in the Internal Revenue Code and the Employee Retirement Income Security Act
of 1974, as amended (ERISA). Such plans are called qualified plans. Qualified DB plans
also generally must provide for an annuity for an eligible surviving spouse. In general,
ERISA applies only to plans sponsored by private sector employers.
20
Multiemployer plans are established through collective bargaining agreements between
labor unions and two or more employers, and plan assets are maintained in a single
account. Multiemployer plans should not be confused with multiple-employer plans, which
are a category of single-employer plans. Multiple-employer plans are typically established
without collective bargaining agreements. Multiple-employer DB plans must be funded as
if each participating employer were maintaining a separate plan.
21
PBGC, 2013 Pension Insurance Data Tables, see http://www.pbgc.gov/prac/data-
books.html
22
To reduce plan liabilities, some DB plan sponsors have offered participants the option of
replacing their annuity with a lump sum payment, so that the participants assume the risks
of managing the funds, and outliving the funds, themselves. See GAO, Private Pensions:
Participants Need Better Information When Offered Lump Sums That Replace Their
Lifetime Benefits, GAO-15-74 (Washington, D.C.: Jan. 27, 2015).
Defined Benefit Plans
Page 9 GAO-16-354 Longevity and Retirement
plans, which generally require participants to bear the risks of managing
their assets.
23
Figure 1: Trends in Number of Private Sector Defined Benefit and Defined
Contribution Plans, 1975-2013
Retirement savings accounts can provide individuals with a tax-
advantaged way to save for retirement, but, unlike DB plans, they
generally require individuals to manage their own assets. There are two
primary types of retirement savings vehicles: employer-sponsored DC
plans, such as 401(k)s, and individual retirement accounts (IRA).
24
DC
plans’ benefits are based on contributions made by workers (and
23
While figure 1 describes pension plans with 100 or more participants, the trend is similar
when comparing all pension plans.
24
As previously mentioned, qualified DC plans must meet certain requirements in ERISA
and the Internal Revenue Code. In addition, to receive tax-advantaged treatment, IRAs
must meet certain requirements in the Internal Revenue Code.
Retirement Savings Accounts
Page 10 GAO-16-354 Longevity and Retirement
sometimes by their employers) and the performance of the investments in
participants’ individual accounts. Workers are generally responsible for
determining their contribution rate, managing their savings and
investments, and deciding how to draw down their assets after
retirement.
25
There are also tax-advantaged retirement savings accounts that are not
employer-sponsored, such as traditional IRAs and Roth IRAs. Eligible
individuals may make contributions to traditional IRAs with pre-tax
earnings and any savings in traditional IRAs are tax-deferred—that is,
taxed at the time of distribution. Eligible individuals’ contributions to Roth
IRAs are made with after-tax earnings and are generally not taxed at the
time of distribution.
26
Individuals may choose to roll over their employer-
sponsored DC plans into an IRA when they leave employment.
27
The projected continuing increase in life expectancy for both men and
women in the United States contributes to longevity risk in retirement
planning. For the Social Security program and employer-sponsored
defined benefit plans, longevity risk is the risk that the program or plan
assets may not be sufficient to meet obligations over their beneficiaries’
lifetimes. For individuals, longevity risk is the risk that they may outlive
any retirement savings they are responsible for managing, such as in a
DC plan.
25
However, employers that sponsor tax-qualified plans are subject to requirements in
administering the plan, including certain fiduciary responsibilities.
26
Both traditional and Roth IRAs are subject to various requirements such as annual
contribution limits, and Roth IRAs are subject to annual income limits.
27
For more information about 401(k) rollovers, see GAO, 401(K) Plans: Labor and IRS
Could Improve the Rollover Process for Participants, GAO-13-30 (Washington, D.C.: Mar.
7, 2013).
Increasing Life
Expectancy Adds to
Challenges for
Retirement Planning
Page 11 GAO-16-354 Longevity and Retirement
Increasing life expectancy adds to the long-term financial challenges
facing Social Security by contributing to the growing gap between annual
program costs and revenues.
28
Although life expectancy is only one factor
contributing to this gap, as individuals live longer, on average, each year
there are more individuals receiving benefits, adding to the upward
pressure on program costs.
According to the 2015 report from the Board of Trustees of the Federal
Old-Age and Survivors Insurance (OASI) and Federal Disability Insurance
(DI) Trust Funds, the Social Security OASI trust fund is projected to have
sufficient funds to pay all promised benefits for nearly two decades, but
continues to face long-term financial challenges. In 2010, program costs
for the combined OASI and DI trust funds began exceeding non-interest
revenues and are projected to continue to do so into the future (see fig.
2). The 2015 Trustees Report projected that the OASI trust fund would be
depleted in 2035, at which point continuing revenue would be sufficient to
cover 77 percent of scheduled benefits.
29
28
We recently examined the challenges facing the Social Security retirement and disability
programs. GAO-16-75SP.
29
The 2015 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors
Insurance and Federal Disability Insurance Trust Funds (Washington D.C.: July 22, 2015).
Increasing Life
Expectancy Adds to
Challenges for Social
Security
Page 12 GAO-16-354 Longevity and Retirement
Figure 2: Trend in the Annual Net Cash Flow of Social Security’s Combined Old-Age and Survivors Insurance and Disability
Insurance Trust Funds, 1980 through 2025 (projected)
Notes: Non-interest revenues are revenues from payroll taxes, taxation of benefits, and
reimbursements from the general fund of the U.S. Department of the Treasury. Total costs include
benefit payments, administrative costs, and Railroad Retirement Board interchange costs. (Interest
revenue is excluded.) Changes made by the Social Security Benefit Protection and Opportunity
Enhancement Act of 2015 may affect these figures. For further information about operations of the
combined trust fund, see The 2015 Annual Report of the Board of Trustees of the Federal Old-Age
and Survivors Insurance and Federal Disability Insurance Trust Funds, 158-159,
https://www.socialsecurity.gov/OACT/TR/2015/.
To help address the long-term financial challenges facing the Social
Security retirement program, various changes have been made over the
years. For example, the Social Security Amendments of 1983 established
a phased-in increase in the full retirement age, gradually raising it from
age 65 (for workers born in 1937 or earlier) to age 67 (for workers born in
Page 13 GAO-16-354 Longevity and Retirement
1960 and later).
30
Also, challenges facing the DI trust fund have affected
OASI. For example, in late 2015, Congress passed a law that reallocates
some tax revenue from the OASI trust fund to the DI trust fund, thus
delaying benefit reductions to DI beneficiaries that were projected to
occur in 2016 until 2022.
31
In addition, a wide range of options to adjust Social Security further have
been proposed. To illustrate this range of options, table 1 provides
examples from among the options and summarizes their effect according
to SSA’s Office of the Chief Actuary (OCACT).
32
Some options would
reduce benefit costs, such as by making adjustments to the retirement
age. Other options would increase revenues, such as by making
adjustments to payroll tax contributions.
33
The table shows the most
recent OCACT analysis, which is based on the intermediate assumptions
of the 2015 Trustees Report and reflects the impact on both the OASI and
DI trust funds combined over the next 75 years. The trustees estimate
that, using intermediate projections, the shortfall toward the end of their
75-year projections would reach 4.65 percent of taxable payroll for 2089.
The options are based on proposals introduced in Congress or suggested
by experts, but are not exhaustive.
34
Each has advantages and
30
According to SSA, throughout the program’s history there have been many changes
intended to increase revenues or reduce expenditures and thereby secure the program.
For example, according to SSA, the tax contribution rate for employees, employers, or
self-employed workers has increased more than 20 times. In addition, changes have been
made to benefits and to cost-of-living adjustments, such as those made by the Social
Security Amendments of 1977 and 1983.
31
The Social Security Benefit Protection and Opportunity Enhancement Act of 2015,
among other things, increased the proportion of the employer and employee tax
contributions to the trust funds that specifically go to the DI trust fund from 1.8 percent to
2.37 percent starting in 2016 through the end of 2018. Pub. L. No. 114-74, tit. VIII, 129
Stat. 584, 601-20. The combined payroll tax remains at 12.4 percent of covered earnings.
32
Social Security Administration Office of Chief Actuary, Summary of Provisions That
Would Change the Social Security Program (Sept. 16, 2015).
33
For more information on payroll tax contributions, see appendix III.
34
Readers interested in a more detailed compendium of proposed changes to the Social
Security programs may refer to the website of the Social Security Administration Office of
the Chief Actuary. The Office of the Chief Actuary has prepared memoranda for many of
the policy options, which include analyses showing the estimated effect of the changes on
the financial status of the Social Security programs. See
http://www.ssa.gov/OACT/solvency/provisions/index.html.
Page 14 GAO-16-354 Longevity and Retirement
disadvantages, and GAO is not recommending or endorsing the adoption
of any of the specific options presented.
35
Table 1: Selected Proposals to Adjust the Social Security Retirement Program and the Projected Effect on Social Security’s
Combined Old-Age and Survivors Insurance and Disability Insurance Trust Funds
Adjustments to the retirement age
•
Continue to increase the full retirement age. According to the Office of the Chief
Actuary’s (OCACT) most recent estimates, raising the full retirement age, beginning
in 2022, by one additional month every 2 years until the retirement age reaches 68
would eliminate 13 percent of the shortfall over the next 75 years.
• Increase the age at which early claiming can take place. OCACT estimates that
raising the early retirement age, starting in 2017, by 2 months each year and ending
in 2034 (ending with the early retirement age at 65) would increase the shortfall by 2
percent over 75 years, due to a corresponding rise in costs for the disability program.
Adjustments to the structure of
retirement benefits
•
Reduce monthly retirement benefits for all retirees. OCACT estimates that reducing
benefits by 3 percent for newly eligible beneficiaries, beginning in 2016, would
eliminate 14 percent of the shortfall over 75 years.
• Reduce initial monthly retirement benefits for those with higher lifetime earnings.
OCACT provides estimates for several progressive price indexing proposals that
reduce benefits for the top category of earnings, for example, reducing the rate at
which benefits are awarded for earnings over the 30th, 40th, 50th or 60th percentile.
The effect of such proposals depends upon the reduction in rate and the point at
which that reduction is applied. OCACT estimates that the proposals they examined
would eliminate 26 to 55 percent of the shortfall over the next 75 years.
Adjustments to payroll tax
contributions
•
Increase the combined payroll taxes for employers and employees (currently 12.4
percent of covered earnings). OCACT examines several options for increasing the
payroll tax rate, with the most significant effect coming from raising the tax rate to
15.2 percent in 2028-2057 and to 18 percent in 2058 and later. That proposal is
estimated to eliminate 110 percent of the shortfall over the next 75 years.
• Eliminate the maximum taxable earnings (currently set at $118,500). OCACT also
examines a number of options for eliminating the taxable maximum. For example,
eliminating the taxable maximum, beginning in 2016, and providing benefit credit for
earnings above the current maximum would eliminate 71 percent of the shortfall over
the next 75 years.
Source: GAO analysis of Social Security Office of Chief Actuary report, 2015. | GAO-16-354
Notes: Estimates of effects are based on the intermediate assumptions of the 2015 Trustees Report
and reflect the impact on the combined trust funds over the next 75 years. We are not recommending
or endorsing the adoption of any particular policy option or package of options.
35
For example, in 2010, we reported that raising the age for early claiming of the Social
Security retirement benefit may put additional stress on the DI trust fund. See GAO, Social
Security Reform: Raising the Retirement Ages Would Have Implications for Older Workers
and SSA Disability Rolls, GAO-11-125 (Washington, D.C.: Nov. 18, 2010).
Page 15 GAO-16-354 Longevity and Retirement
Although there are many factors at play in the decline of defined benefit
(DB) plans, increasing life expectancy adds to the challenges these plans
face by increasing the financial obligations needed to make promised
payments for their beneficiaries’ lifetimes.
36
For example, plan sponsors
and industry experts estimate that the Society of Actuaries’ 2014 revised
mortality tables, if adopted for DB plans, would increase plan obligations
by 3.4 to 10 percent, depending on the characteristics of a plan’s
participants.
37
As of 2012, more than 85 percent of single-employer DB
plans were underfunded by a total of more than $800 billion, according to
the most recent data available from the Pension Benefit Guaranty
Corporation (PBGC).
38
DB plan sponsors have increasingly been taking
steps, known as “de-risking,” to either reduce risk or shift risk away from
sponsors, often to participants. De-risking can be classified as internal or
external.
39
Internal de-risking approaches include reducing risk by (1) shifting plan
assets into safer investments that better match certain characteristics of a
plan’s benefit liabilities, and (2) restricting growth in the size of the plan by
restricting future plan participation or benefit accruals, such as by
“freezing” the plan (variations of which include closing the plan to newly-
hired workers or eliminating the additional accrual of benefits by those
already participating in the plan). In 2012, more than 40 percent of single-
employer DB plans were frozen in some form, according to the most
recent data available from PBGC, and many frozen plans are ultimately
terminated, which can shift the risk of ensuring an adequate lifetime
retirement income to individuals, as discussed below.
36
Sponsors of DB plans are also responsible for managing financial risks, such as
fluctuations in the value of plan assets and in interest rates, either of which can cause
volatility in the plan’s funded status and plan contributions.
37
The Internal Revenue Service (IRS) prescribes and periodically revises mortality tables
to be used by qualified DB plans to calculate the plans’ funding target and other funding
calculations. The current mortality tables are based, in part, on mortality tables developed
by the Society of Actuaries in 2000. IRS expects to issue proposed regulations revising
the mortality tables for future years and has solicited comments on this issue, including on
the 2014 revised Society of Actuaries tables. IRS Notices 2013-49 and 2015-53.
38
Single-employer plans covered 75 percent of DB participants in 2014. PBGC, 2013
Pension Insurance Data Tables, http://www.pbgc.gov/prac/data-books.html.
39
For qualified DB plans, any de-risking actions must comply with requirements in ERISA
and the Internal Revenue Code in order to maintain their tax-advantaged status.
Increasing Life
Expectancy Adds to
Challenges for Defined
Benefit Plans
Page 16 GAO-16-354 Longevity and Retirement
External de-risking involves closing the plan completely (referred to as
terminating the plan) or reducing the size of the plan by transferring a
portion of plan liabilities, plan assets, and their associated risk to external
parties—typically either to participants or to an insurance company. For
example, an employer may terminate its DB plan, if it can fund all of the
benefits owed through the purchase of a group annuity contract from an
insurance company (sometimes called a “group annuity buy-out”).
40
Short
of termination, an employer can also transfer a portion of plan assets and
liabilities to an insurance company for a certain group of plan participants,
such as former employees with vested benefits.
41
Alternatively, an
employer may, under certain circumstances, terminate its DB plan by
paying all the benefits owed in another form, such as by providing a lump
sum to each participant or beneficiary of the plan, if the plan permits. The
employer could also opt to make a lump sum buy-out offer only to certain
plan participants.
42
When such an offer is made, plan participants have a
specified amount of time, known as the lump sum “window,” to choose
between keeping their lifetime annuity or taking a lump sum. Participants
40
Such actions are referred to as “standard terminations.”
41
Once responsibility is transferred to an insurance company, the participant’s rights and
protections are circumscribed by the annuity contract, the financial status of the issuer,
and state guarantees, rather than the protections under ERISA, although in some cases,
ERISA provisions may be incorporated into the annuity contract. In general, once the
transaction is complete, the participant will receive an annuity certificate from the
insurance company, and then will receive payments from that insurer, with protections
from the state insurance system and state guaranty associations. See 2013 ERISA
Advisory Council Report, Private Sector Pension De-risking and Patient Protections.
42
Until recently, DB plan sponsors were offering lump sum payments to participants who
were receiving annuity payments (known as “lump sum window offers”). On July 9, 2015,
IRS issued a notice stating its intent to prohibit these lump sum window offers, effective as
of the date of the notice, and stating that the regulations would be amended accordingly.
According to agency officials, other instances of accelerated benefit payments, including
lump sum buyouts to participants who were separating from employment but had not yet
begun collecting their benefits, and those allowed pursuant to the regulations under
Internal Revenue Code section 401(a)(9), were unaffected by the notice. The notice also
allowed for the continuation of certain lump sum window offers already in process. IRS
Notice 2015-49.
Page 17 GAO-16-354 Longevity and Retirement
who accept the lump sum assume all of the risk of managing the funds for
the remainder of their lives.
43
A key reason that individuals face challenges in planning for retirement is
that many people do not understand their life expectancy, the number of
years they will likely spend in retirement, or the amount they should save
to support their retirement. For example, a survey conducted by the
Society of Actuaries showed that there is a greater tendency for retired
respondents to underestimate rather than overestimate their life
expectancy.
44
In addition, many individuals will live beyond their life
expectancy in any case, since it is an average. Further, as we reported in
2015, older workers tend to retire sooner than they expected. Coupled
with increasing life expectancy, this means they will likely spend more
years in retirement than anticipated.
45
In 2015, more than a third of
workers surveyed by the Employee Benefit Research Institute reported
that they expected to retire at age 66 or later and an additional 10 percent
expected to never retire; however, only 14 percent of current retirees
reported that they retired after age 65. Similarly, 9 percent of workers said
they expected to retire before age 60, while 36 percent of current retirees
reported they retired earlier. The median age of retirement reported was
age 62.
46
Additionally, only 48 percent of those surveyed had calculated
how much in savings they would need for retirement.
47
43
In a previous report, we found that while comprehensive data on lump sum window
offers were not available, experts generally agreed that use of such offers was becoming
more frequent. GAO-15-74. Since this report was published, IRS issued a notice,
described previously, that generally prohibits lump sum window offers for those
participants already receiving benefits from a DB plan, without affecting other allowed
lump sum payments from a DB plan. Thus, any current expectation of future lump sum
window offers would likely be limited to separated vested employees (i.e., former
employees) who are not currently receiving benefits under a DB plan. IRS Notice 2015-49.
44
Society of Actuaries, Key Findings and Issues: Longevity, 2011 Risks and Process of
Retirement Survey Report (June 2012).
45
GAO, Retirement Security: Most Households Approaching Retirement Have Low
Savings, GAO-15-419 (Washington, D.C.: May 12, 2015).
46
This broadly aligns with SSA data on when individuals claim Social Security retirement
benefits. See GAO-14-311.
47
Employee Benefit Research Institute, The 2015 Retirement Confidence Survey: Having
a Retirement Savings Plan a Key Factor in Americans’ Retirement Confidence (April
2015).
Increasing Life
Expectancy Adds to
Challenges for Individuals’
Retirement Planning
Page 18 GAO-16-354 Longevity and Retirement
Beyond underestimating life expectancy, individuals preparing for
retirement face a number of additional challenges in accumulating
retirement savings sufficient to sustain them for their lifetime. In previous
work we found that many households near or in retirement have little or
no retirement savings (see table 2).
48
Nearly 30 percent of households
headed by individuals age 55 and older have neither retirement savings
nor a DB plan.
Table 2: Retirement Savings Held by Households Headed by Individuals near or in Retirement, 2013
Households headed by
individuals age 55-64
Households headed by
individuals age 65-74
Households headed by
individuals age 75 and older
Percent with no retirement savings
41
52
71
Percent with retirement savings
59
48
29
median amount saved
$104,000
$148,000
$69,000
equivalent inflation-adjusted annuity
$310 per month
(for a 60-year-old)
$649 per month
(for a 70-year-old)
$467 per month
(for an 80-year-old)
Source: GAO analysis of 2013 Survey of Consumer Finances data. | GAO-16-354
About half of private sector employees do not participate in any employer-
sponsored retirement plan.
49
In previous work, we found that among
those not participating, 84 percent reported that their employer did not
offer a plan or they were not eligible for the program their employer
offered.
50
Those that do participate in employer-sponsored retirement
plans are increasingly offered access only to DC plans, which—unlike DB
plans—do not typically provide a guaranteed monthly benefit for life. For
many of these participants, the level of savings accumulated in their DC
retirement accounts at the time they leave the workforce will not be
48
We also found that more than 70 percent of households headed by individuals age 55-
64 also carry debt. GAO-15-419.
49
U.S. Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in
the United States (March 2015).
50
See GAO, Retirement Security: Federal Action Could Help State Efforts to Expand
Private Sector Coverage, GAO-15-556 (Washington, D.C.: Sept. 10, 2015).
Page 19 GAO-16-354 Longevity and Retirement
sufficient to sustain their retirement.
51
Moreover, employer-sponsored DC
plans typically offer only an account balance at retirement, leaving
participants to identify longevity risks and manage how they will draw
down their funds over the course of their retirement.
52
To help address individuals’ difficultly in estimating their life expectancy
and the resources needed to avoid outliving their savings, the federal
government, plan sponsors, and others have developed certain tools to
aid with retirement planning. For example, benefits calculators assist
participants in translating their savings into potential annual retirement
income. One such calculator, available on the U.S. Department of Labor’s
website, assumes survival to age 95, which is beyond the average life
expectancy for individuals currently age 65.
53
To encourage saving
among those who lack access to employer-sponsored plans, in
November 2015, myRA, a federal government-managed retirement
savings program, was opened to individuals below a certain income
threshold.
54
Also, as we reported in 2015, a number of states are
exploring strategies to expand private sector coverage for people who
51
Women are particularly at risk of outliving their savings because they live longer, on
average, than men, although the gap between the sexes is diminishing. Additionally, as
discussed in previous reports, women who participate in DC plans contribute less to their
plans. Women age 65 and over have less retirement income, on average, and live in
higher rates of poverty than men in that age group. See GAO, Retirement Security:
Women Still Face Challenges, GAO-12-699 (Washington, D.C.: July 19, 2012) and GAO
Retirement Security: Older Women Remain at Risk, GAO-12-825T (Washington, D.C.:
July 25, 2012).
52
In 2012, we reported that annuities are complex, represent some risks to consumers,
and require them to make multiple complex decisions. See GAO, Retirement Security:
Annuities with Guaranteed Lifetime Withdrawals Have Both Benefits and Risks, but
Regulation Varies across States, GAO-13-75 (Washington, D.C.: Dec. 10, 2012).
53
The U.S. Department of Labor offers two calculators:
http://askebsa.dol.gov/retirementcalculator/ui/general.aspx and
http://www.dol.gov/ebsa/regs/lifetimeincomecalculator.html. More calculators are available
from financial services companies and others. We recently recommended that the
Secretary of Labor take action to help workers make appropriate adjustments to the
replacement rates used in calculating their specific retirement income needs. This
included modifying the U.S. Department of Labor’s retirement planning tools. See GAO,
Retirement Security: Better Information on Income Replacement Rates Needed to Help
Workers Plan for Retirement, GAO-16-242 (Washington, D.C.: Mar. 1, 2016).
54
The U.S. Department of the Treasury created a new nonmarketable, electronic savings
bond for the myRA program, which allows eligible individuals to establish Roth IRAs.
MyRA allows individuals to make one-time contributions or set up recurring contributions
(which can be deducted from their wages) that will be invested in these savings bonds.
Page 20 GAO-16-354 Longevity and Retirement
otherwise do not have access to a plan.
55
In addition, for those with
employer-sponsored plans, the Pension Protection Act of 2006 included
provisions that made it easier for certain DC plan sponsors to implement
automatic enrollment and automatic escalation so that workers can be
defaulted into plan participation with rising contributions over time.
56
Default investment arrangements, including target date funds which
invest according to length of time until retirement, can also help
participants to maintain a balanced investment portfolio with a level of risk
that is appropriate to their retirement dates. Moreover, to provide greater
assurance that individuals with DC plans will not outlive their savings,
some plan sponsors are adding an annuity option at retirement.
57
In
addition, Internal Revenue Service (IRS) regulations that went into effect
in July 2014 allow for a Qualified Longevity Annuity Contract whereby
participants in 401(k) and other qualified DC plans and traditional IRAs
may use a portion of their accounts to purchase annuities that begin
payout no later than age 85.
58
In sum, despite the efforts by the federal government, plan sponsors, and
others to encourage greater retirement savings, many individuals may not
be adequately prepared for retirement. The trend toward increasing life
55
GAO-15-556.
56
Pub. L. No. 109-280, 120 Stat. 780. Among other things, the Act exempted “automatic
contribution arrangements” that meet certain criteria from ERISA nondiscrimination testing
requirements. The Act also provided for qualifying automatic contribution arrangements to
receive protection from fiduciary liability for their default investments, if they meet certain
notice requirements and other conditions established by the U.S. Department of Labor.
See 29 C.F.R. § 2550.404c-5. In addition, in September 2009, the U.S. Department of the
Treasury announced IRS actions designed to further promote automatic enrollment and
the use of automatic escalation policies. These IRS actions included Revenue Ruling
2009-30, which demonstrates ways a 401(k) plan sponsor can include automatic
contribution increases in its plan, and Notice 2009-65, which includes sample automatic
enrollment plan language that a 401(k) plan sponsor can adopt with automatic IRS
approval.
57
Although the market remains relatively small, certain annuity contracts for retirees have
been increasing in recent years, growing by 16 percent in 2012 alone. See Variable
Annuity Guaranteed Living Benefits Utilization, 2012 Experience, A Joint Study by the
Society of Actuaries and LIMRA.
58
The regulations require that the qualified longevity annuity contract meet various
requirements, such as limitations on premiums and certain disclosure and annual
reporting requirements. The regulations also provide that the maximum age to begin
payout may be adjusted to reflect changes in mortality. 26 C.F.R. § 1.401(a)(9)-6.
Page 21 GAO-16-354 Longevity and Retirement
expectancy may mean that more individuals outlive their savings, with
only their Social Security benefits to rely on.
Lower-income individuals have shorter-than-average life expectancy,
which means that they can expect to receive Social Security retirement
benefits for substantially fewer years than higher-income individuals who
have longer-than-average life expectancy. As a result, when disparities in
life expectancy are taken into account, our analysis indicates that, on
average, projected lifetime Social Security retirement benefits are
reduced for lower-income individuals but are increased for higher-income
individuals, relative to what they would have received if they lived the
average life expectancy for their cohort.
59
Also, our analysis indicates that
one frequently suggested change to address Social Security’s financial
challenges, raising the retirement age, would further reduce projected
lifetime benefits for lower-income groups proportionally more than for
higher-income groups.
People with lower incomes can expect to live substantially fewer years as
they approach retirement than those with higher incomes, on average,
according to studies we identified and reviewed. For example, these
studies estimate that lower-income men approaching retirement live
between 3.6 and 12.7 fewer years than those in higher-income groups, on
average, depending on birth year and other factors such as whether
income groups were calculated by top or bottom half, quartile, quintile, or
decile (see table 3).
60
Similarly, studies we reviewed found that lower-
income women also live fewer years than higher-income women, on
average, with the differences ranging more widely, from 1.5 years to 13.6
59
As noted earlier, life expectancy can be expressed in two different ways: (1) as the
average number of years of life remaining for a group, or (2) as the average age at death
for a group. For simplicity, in this report, we generally use the term to mean the latter
expression (average age at death), and use the phrase “years of life remaining” when
referring to the former expression.
60
We reviewed selected longevity studies published in the past 10 years (see appendix I).
Life Expectancy
Disparities Negatively
Affect Retirement
Resources for Lower-
Income Groups
Lower-Income Groups’
Life Expectancy Has Not
Increased as Much as
Higher-Income Groups’
Life Expectancy
Page 22 GAO-16-354 Longevity and Retirement
years.
61
However, there are factors that make projecting life expectancy
for women by income more difficult than for men.
62
It is not unexpected
for life expectancy estimates to vary as they depend, among other things,
on the particular data sources, populations, and age ranges analyzed.
While the studies we reviewed found a range of life expectancy
differences by income, each of them finds that disparities exist.
63
61
The Population Health Metrics study of U.S. life expectancy, 1985-2010, that found
significant county level differences in life expectancy, by sex (described earlier in the
background), reported finding effectively “no relationship” between life expectancy and
county level per capita income. See Haidong Wang et al., 2013. However, another study
that looked at county level mortality rates in 2010 found that the lower the household
income, the higher the risk of premature death. See E.R. Cheng and D.A. Kindig,
“Disparities in Premature Mortality between High- and Low-Income U.S. Counties,”
Centers for Disease Control and Prevention (Mar. 28, 2012). A subsequent study by the
same authors found that mortality among women rose in 43 percent of counties over two
decades. The factors found to be most significantly associated with reductions in county
level mortality rates for both men and women were: percentage of Hispanic residents,
adults with a college degree, population density, and median household income. See
David A. Kindig and Erika R. Cheng, “Even As Mortality Fell in Most U.S. Counties,
Female Mortality Nonetheless Rose in 42.8 Percent of Counties from 1992 to 2006,”
Health Affairs, Vol 32, No 3 (March 2013).
62
According to studies we reviewed, developing life expectancy estimates for women by
income is more difficult than for men, in part because women’s income, on average,
makes up a smaller share of household income. For example, women are more likely to
work part time and earn less than men. Some studies have attempted to overcome this by
using income calculations other than individual income for women—for example, using
household income or using their spouses’ income. While these measures of income may
alleviate some challenges, some experts believe estimates of life expectancy by income
for women are still less reliable than such estimates for men. Further, it is difficult to
assess changes in women’s life expectancy by income because women’s participation in
the labor force and individual earnings have grown over the last several decades.
63
Two of the studies we reviewed calculated mortality rates rather than life expectancy.
While the results are not directly comparable, these studies found that individuals with
lower incomes have higher mortality rates and therefore shorter life expectancy than those
with higher incomes.
Page 23 GAO-16-354 Longevity and Retirement
Table 3: Selected Studies’ Projected Life Expectancy over Time for Men Approaching Retirement, by Income Group
Author (year)
Lifetime income
groupings for
comparison
(lower-income to
higher-income)
Age at which
projected life
expectancy
calculated
Projected life expectancy for
men by income gro
up:
Difference
between lower-
and higher-
income groups
Difference compared
to prior cohort (birth
cohorts compared)
Lower-
income
Higher-income
Bosworth, Burke
(2014)
Second decile to
second-highest
decile
55
80.7 years
87.1 years
6.4 years
Increased by 4 years
(between the 1920 and
1940 cohorts, for the
top and bottom
deciles)
Congressional
Budget Office
(2014)
Bottom quintile to
top quintile
a
65
89.5 years
95.7 years
6.2 years
Increased by 2.8 years
(between the 1949 and
1974 cohorts)
Cristia (2009)
Bottom quintile to
top quintile
35 to 76
n/a
n/a
3.6 years
Increased by 0.9 years
(between the 1983-
1997 and 1998-2003
periods)
Goldman, Orszag
(2014)
Bottom quartile to
top quartile
65
80.2 years
85.7 years
5.5 years
Increased by 2.4 years
(between the 1928 and
1960 cohorts)
National Academy
of Sciences (2015)
Bottom quintile to
top quintile
50
76.1 years
88.8 years
12.7 years
Increased by 7.6 years
(between the 1930 and
1960 cohorts)
Waldron (2007)
Bottom half to top
half
65
81.1 years
86.5 years
5.3 years
Increased by 4.7 years
(between 1912 and
1941 cohorts)
Source: GAO analysis of studies listed above. | GAO-16-354
Notes: This table includes studies we reviewed that estimate life expectancy by income over time for
individuals approaching retirement age (see appendix I for full list of studies we reviewed). It excludes
one study that estimates period life expectancy over time for white males and females only. Other
studies we excluded that do not estimate life expectancy over time include two studies that estimate
mortality rates, one study that estimates life expectancy for a hypothetical 1920 cohort and does not
provide information on all races together, and one study that estimates life expectancy at age 25 by
poverty threshold.
a
These estimates do not include Disability Insurance beneficiaries, who tend to have higher mortality
rates than the general population.
Moreover, disparities in life expectancy by income have grown, according
to the studies that examined trends over time (see table 3).
64
Specifically,
64
One additional study examined changes over time, but the projections were based on
period life expectancy rather than cohort estimates, so we do not include them here.
Page 24 GAO-16-354 Longevity and Retirement
all of the six studies we reviewed that examined trends over time found
growth in life expectancy differences, ranging from 0.9 to 7.6 years for
men, depending on the age, birth years, and measure of income used.
For example, a 2007 study by SSA’s Hilary Waldron found that for men
age 65 who were born in 1912, there was only a 0.7 year difference in
expected years of life remaining between top and bottom earners, but for
those born in 1941, the expected difference grew to 5.3 years (see fig.
3).
65
Similarly, for women, the studies we reviewed found differences in
life expectancy by income were greater in more recent years, and the
range in years was wider than for men. This is perhaps unsurprising, as
some analysts have noted that disparities in household income also
increased over time. According to a 2014 Congressional Budget Office
(CBO) report, between 1979 and 2011, average real after-tax earnings for
the top one percent of households grew about four times as fast as those
in the lowest fifth.
66
65
This estimate was for Social Security-covered males. Hilary Waldron, “Trends in
Mortality Differentials and Life Expectancy for Male Social Security-Covered Workers, by
Socioeconomic Status,” Social Security Bulletin, vol. 67, no. 3 (2007).
66
Congressional Budget Office, The Distribution of Household Income and Federal Taxes,
2011 (Washington, D.C.: November, 2014). See also DeNavas-Walt, Carmen, and
Proctor, Bernadette D., Income and Poverty in the United States: 2014 (Washington, D.C.:
U.S. Census Bureau, September 2015).
Page 25 GAO-16-354 Longevity and Retirement
Figure 3: Differences in Projected Years Remaining for Men, by Income Group
While higher-income groups have experienced significant growth in their
life expectancy at older ages, lower-income groups have either
experienced less growth or declines in recent decades, according to
studies we reviewed. For example, Waldron’s 2007 study projected that
65-year-old men born in 1941 with below-median earnings would live 1.3
years longer than their counterparts born in 1912, while 65-year-old men
born in 1941 with above-median earnings would live 6 years longer than
their counterparts born in 1912. Some other studies estimate that life
expectancy declined for those in the bottom of the income distribution.
For instance, a 2015 study by the National Academy of Sciences found
that life expectancy at age 50 has declined for both men and women in
Page 26 GAO-16-354 Longevity and Retirement
the bottom income quintile.
67
Specifically, men and women in the bottom
income quintile saw life expectancy decreases of 0.5 and 4 years,
respectively, when comparing the 1930 and 1960 cohorts. While the
studies we reviewed do not all agree about whether life expectancy is
decreasing or increasing slightly for the lowest earners, they all agree that
the higher-income groups are gaining more years than the lower-income
groups.
68
Some studies show that there are disparities in life expectancy by other
characteristics that have been linked with income, such as race and
education. For example, the CDC reported that the life expectancy for 65-
year-old black individuals was 1.2 years less than for their white
counterparts in 2013.
69
Other studies have also examined links with
education and found that individuals with a high school degree or less
67
National Academies of Sciences, Engineering, and Medicine, The Growing Gap in Life
Expectancy by Income: Implications for Federal Programs and Policy Responses
(Washington, D.C.: The National Academies Press, 2015).
68
Some studies have found that higher-income individuals’ life expectancy has benefitted
most from health improvements, such as reduced smoking rates. For example, Bosworth,
Burtless, and Zhang found a significant decline in the risk of dying from cancer or heart
conditions for older Americans with above-average lifetime incomes but not for those with
below-average incomes. See Barry P. Bosworth, Gary Burtless, and Kan Zhang, Sources
of Increasing Differential Mortality among the Aged by Socioeconomic Status (Chestnut
Hill, MA: Center for Retirement Research at Boston College, June 2015). For a related
study by these authors, see also Barry Bosworth, Gary Burtless, and Kan Zhang, Later
Retirement, Inequality in Old Age, and the Growing Gap in Longevity between Rich and
Poor (Washington, D.C.: The Brookings Institution, Feb. 12, 2016).
69
National Center for Health Statistics, Health, United States, 2014: With Special Feature
on Adults Aged 55-64 (Hyattsville, MD: 2015). In addition, in contrast to the findings for
black individuals, according to studies we reviewed, Hispanic individuals tend to live
longer than non-Hispanic individuals, even though they have lower average education and
income, which are factors typically associated with shorter life expectancy. For example,
the National Center for Health Statistics at the CDC estimates that in 2013, Hispanic men
at age 65 could expect to live approximately 1 to 3 years longer than their white and black
counterparts, respectively, while Hispanic women could expect to live nearly 2 to 3 years
longer. (National Center for Health Statistics, 2015.) Though the cause is unclear, some
research has suggested that their longer life expectancy is related to the health of
immigrants (Hispanic immigrants are healthier, on average, than those who do not
migrate) or cultural factors such as kinship networks, and that this anomaly will diminish
with subsequent generations. “The Health and Life Expectancy of Older Blacks and
Hispanics in the United States,” Today’s Research on Aging, Issue 28 (Population
Reference Bureau, June 2013).
Page 27 GAO-16-354 Longevity and Retirement
tend to have shorter lives than those with a college education.
70
However,
because the primary focus of our analysis was on life expectancy for
adults approaching retirement by income group, we did not conduct a
complete review of the studies related to other characteristics.
Lower-income individuals generally rely on Social Security as their
primary source of retirement income, so their retirement security is
affected most by how that program is structured. We found that when
differences in life expectancy by income are factored in, the amount of
projected lifetime benefits received by lower-income individuals is
reduced, while the amount of projected lifetime benefits received by
higher-income individuals is increased. As a result, although the formula
for calculating monthly Social Security retirement benefits is
progressive—replacing a greater percentage of a lower-income than a
higher-income worker’s pre-retirement income on a monthly basis—
differential life expectancy reduces the progressivity of Social Security
benefits received over a lifetime.
71
Social Security is the largest determinant of lower-income individuals’
retirement security because, for most such individuals, it is the main
source of their retirement income. In a previous report, we analyzed data
from the 2013 Survey of Consumer Finances and estimated that 86
percent of recent retiree households in the lowest income quintile rely on
70
For other studies that examine race and education, see S. Jay Olshansky et al.,
“Differences in Life Expectancy Due to Race and Educational Differences are Widening
and Many May Not Catch Up,” Health Affairs, 31, no. 8 (2012): 1803-1813; and John
Bound et. al, The Implications of Differential Trends in Mortality for Social Security Policy
(Ann Arbor, MI: Michigan Retirement Research Center, University of Michigan, October
2014). For example, the 2012 study found that a 65-year-old college-educated black man
could expect to live, on average, 1.9 years less than a white man with the same age and
education.
71
We focused our analysis on Social Security because it is the main source of retirement
income for most lower-income individuals. We did not analyze the effect of differential life
expectancy on other retirement resources, such as retirement savings and DB plans, nor
did we analyze the adequacy of these retirement resources.
Differences in Life
Expectancy Result in
Reduced Projected
Lifetime Social Security
Benefits for Lower-Income
Groups
Lower-Income Groups Rely
Primarily on Social Security
Page 28 GAO-16-354 Longevity and Retirement
Social Security for the majority of their income.
72
About half of recent
retiree households in the lowest income quintile rely on Social Security for
more than 90 percent of their income. Overall, in that report we found that
those with lower incomes have more limited resources for retirement
aside from Social Security.
Recent retiree households in the lowest income quintile are much less
likely to have retirement savings and DB plans than those in higher
quintiles.
73
Specifically, as we previously found, only 9 percent have any
retirement savings (compared to 84 percent in the top income quintile)
and 19 percent have a DB plan (compared to 65 percent in the top
income quintile), which typically provides a monthly stream of retirement
income for life. Households without retirement savings have few other
resources, we found, which puts them at a high risk of outliving their non-
Social Security resources. One reason for the lack of retirement savings
among lower-income individuals is their lack of access to employer-
sponsored retirement savings plans. As we reported in 2015, coverage by
and participation in workplace retirement savings programs are also lower
among lower-income workers. Specifically, workers in the lowest income
quartile were nearly four times less likely than workers in the highest
income quartile to work for an employer that offers a retirement savings
program, after controlling for other factors.
74
Similarly, we found that
approximately 14 percent of workers in the lowest income quartile
participated in a workplace retirement savings program compared to 76
percent of those in the highest income quartile.
72
See GAO-15-419. The Survey of Consumer Finances is a nationally representative
study sponsored by the Board of Governors of the Federal Reserve. “Recent retiree
households” refers to households headed by someone age 65 to 74. For the estimate of
86 percent, we are 95 percent confident that the percentage is between about 81 and 91
percent. Similarly, for the estimate of half in the next sentence, we are 95 percent
confident that the percentage is between about 41 and 57 percent.
73
GAO-15-419. For purposes of that report, “retirement savings” includes assets in DC
plans, such as 401(k) plans, and IRAs. It does not include the value of DB plans unless
the DB plan benefit has been taken as a lump sum and converted into an IRA or other
account balance. It also does not include home equity or savings held outside of a
retirement account.
74
GAO-15-556. For purposes of that report, “workplace retirement savings program”
includes employee benefit plans, such as 401(k) plans, and employer-provided IRAs, such
as payroll deduction IRAs. It did not include IRAs that individuals may establish on their
own outside the workplace.
Page 29 GAO-16-354 Longevity and Retirement
According to our analysis, shorter-than-average life expectancy for lower-
income individuals results in a projected reduction in lifetime Social
Security benefits received. We calculated the projected lifetime Social
Security benefits that would be received for men in various hypothetical
scenarios to illustrate the effect of lower-than-average life expectancy on
lower-income groups (which we defined as those with individual annual
incomes at the 25th percentile, or about $20,000, according to Census
data).
75
Our analysis indicates that, on average, the projected lifetime
benefits for these lower-income individuals would be reduced by as much
as 11 to 14 percent due to their shorter-than-average life expectancy (or
“differential” life expectancy) when compared to what they would receive
if they had an average life expectancy (see fig. 4).
76
75
Our analysis looked at individual income groups at the 25
th
and 75
th
percentiles (which
we refer to as lower- and higher-income in our scenarios) because Waldron’s 2007 study
produced estimates for the top and bottom half of lifetime income, and these percentiles
represent the mid-point for each group. Based on this and an analysis of Census data, we
used $20,000 as the lower income (which is roughly 160 percent of the U.S. Census
Bureau’s 2014 federal poverty threshold for a single householder under 65), and $80,000
as the higher income (which is roughly 650 percent of the same federal poverty threshold).
For details on how we constructed our scenarios, see appendix II.
76
Our analysis used two sets of life expectancy estimates: (1) Hilary Waldron’s 2007
estimates of life expectancy by income for the 1941 cohort and (2) SSA’s actuarially
assumed (average) life expectancy for the 1941 cohort, based on the intermediate
assumptions of the 2015 Trustees Report. For our purposes, we assigned a birth year of
1953 for our scenario individuals and assumed the life expectancy experiences of the
1941 cohort in order to incorporate the life expectancy estimates from Waldron’s 2007
study. As most studies we reviewed found increasing disparities in life expectancy, our
use of this study may underestimate the effect of life expectancy differences for more
recent cohorts.
In addition, our analysis looked at life expectancy for men because we used Hilary
Waldron’s 2007 estimates of life expectancy by income, which did not include women.
However, we believe the general conclusions we drew from our scenarios apply to all
individuals, in part because studies we reviewed found that lower-income women also
have shorter life expectancies than higher-income women.
Shorter Life Expectancy
Resu
lts in Lower Projected
Lifetime Benefits
Page 30 GAO-16-354 Longevity and Retirement
Figure 4: Shorter Life Expectancy Leads to Reduced Projected Lifetime Social
Security Retirement Benefits for Lower-Income Men
For example, our calculations show that for a hypothetical 62-year-old
man in the lower-income group:
• If he were to claim Social Security benefits now, and live to age 83
(the average life expectancy for men age 62 in the United States),
Page 31 GAO-16-354 Longevity and Retirement
he would receive an estimated $156,000 over his lifetime, or about 7.8
times his current income.
77
• If he were to claim Social Security benefits now, and live to age 80
(the differential life expectancy for 62-year-old men in his income
group), he would receive an estimated $138,000 over his lifetime, or
about 6.9 times his current income, a reduction of 11 percent.
However, if a man in the lower-income group delayed claiming Social
Security until age 70, the maximum age that will result in increased
monthly benefits, and then lived until age 83 (the differential life
expectancy for 70-year-old men in his income group), he would receive
an estimated $185,000, or a 14 percent reduction in his lifetime benefits
when compared to what he would receive if he lived until age 85 (the
average life expectancy for 70-year-old men).
78
We also calculated the projected lifetime Social Security benefits that
would be received for men in the same hypothetical scenarios to illustrate
the effects of differential life expectancy on higher-income groups (which
we defined as those with individual annual incomes at the 75th percentile,
or about $80,000, according to Census data). In contrast to lower-income
individuals, higher-than-average life expectancy for higher-income
individuals results in an increase in lifetime Social Security benefits
received when compared to average life expectancy—as much as 16 to
18 percent (see fig. 5).
77
These scenarios are illustrative in nature and should not be used to predict future
outcomes. It is possible that the 1941 cohort, whose life expectancy data we used, are
different than past or future cohorts. The dollar amounts are not adjusted for present value
for simplicity and in order to focus on the effects of differential life expectancy. We also
performed our calculations with adjustments for present value and found results consistent
with our basic finding, in this case that shorter life expectancy results in reduced average
present value of lifetime Social Security benefits. For present value adjusted figures, see
appendix II.
78
As noted in the background, life expectancy at an older age is greater than at a younger
age, since the averages for older persons do not include those who have died before that
age. Thus, for the purposes of our scenarios, when we describe projected lifetime benefits
for an individual who delays claiming until a given age, we assume that the individual
reached that claiming age and therefore has the corresponding longer life expectancy.
Page 32 GAO-16-354 Longevity and Retirement
Figure 5: Longer Life Expectancy Leads to More Projected Lifetime Social Security
Retirement Benefits for Higher-Income Men
For example, our calculations show that for a hypothetical 62-year-old
man in the higher-income group:
• If he were to claim Social Security benefits now and live to age 83
(the average life expectancy for men age 62 in the United States),
he would receive an estimated $355,000 over his lifetime, or about 4.4
times his current income.
• If he were to claim Social Security benefits now and live to age 86
(the differential life expectancy for 62-year-old men in his income
group), he would receive an estimated $411,000 over his lifetime, or
about 5.1 times his current income, an increase of 16 percent.
Page 33 GAO-16-354 Longevity and Retirement
However, if a man in the higher-income group delayed claiming Social
Security until age 70, the maximum age that will result in increased
monthly benefits, and then lived until age 88 (the differential life
expectancy for 70-year-old men in his income group), he would receive
an estimated $595,000, or an 18 percent increase in his lifetime benefits
when compared to what he would receive if he lived until age 85 (the
average life expectancy for 70-year-old men).
Rather than claiming benefits when first eligible at age 62, it is often
beneficial for individuals to delay claiming Social Security benefits
because it results in larger monthly benefits.
79
However, lower-than-
average life expectancy may reduce the value of delayed claiming of
benefits for lower-income individuals. For example, in our scenarios,
shorter life expectancy reduces the added lifetime benefit of delaying
claiming until age 70 (compared to early claiming at age 62) by nearly
two-thirds of one year’s earnings for a lower-income man.
80
In addition, it
may be more difficult for a low-income individual to delay claiming, for
example, after a job loss or a depletion of retirement savings.
81
While
many factors may influence someone’s decision about when to claim
benefits—such as when a spouse claims—deciding when to claim
benefits may be particularly important for women, who tend to have lower
earnings but longer lives than men.
Social Security’s formula for calculating monthly benefits is progressive—
that is, it provides a proportionally larger monthly earnings replacement
for lower-earners than for higher-earners.
82
However, our analysis of SSA
79
GAO-14-311.
80
These amounts could change using a different claiming age and comparison age.
81
Moreover, in a previous report, we found that a much smaller share of people in
professional or managerial occupations claimed benefits prior to their full retirement age
when compared to blue-collar and other workers. GAO-14-311.
82
Retired workers with relatively lower average career earnings receive monthly benefits
that, on average, equal about half of what they made while working, while workers with
relatively higher career earnings receive benefits that equal about 30 percent of prior
earnings. See the background section of this report for more information.
It is important to note that Social Security’s progressive benefits formula cannot make up
for all social inequalities, be they related to health, life expectancy, labor market forces, or
other issues. Additionally, Social Security benefits are not adjusted for life expectancy
differences by income or for “adverse selection,” meaning the possibility that workers in
good health may tend to commence benefits at a later age than workers in poor health.
Lower Projected Lifetime
Benefits Result in Reduced
Progressivity
Page 34 GAO-16-354 Longevity and Retirement
data indicates that life expectancy differences reduce the size of this
progressivity over a beneficiary’s lifetime (see fig. 6). Specifically,
differential life expectancy results in reduced projected lifetime benefits
for lower-income groups and increased projected lifetime benefits for
higher-income groups, relative to average life expectancy, thereby
decreasing the lifetime progressivity of the program. Moreover, studies
we reviewed suggest the gap in life expectancy has grown. If the gap
continues to grow, the progressivity in Social Security’s lifetime benefits
will likely continue to decrease.
Figure 6: Shorter Life Expectancy Leads to Proportionally Less Lifetime Social
Security Retirement Benefits for Hypothetical Lower-Income Men
Although present value adjustments are an important economic tool to
account for the time value of money, we chose to use unadjusted figures
in our scenarios for several reasons, but primarily because of our focus
on the effects of differential life expectancy, including the importance of
benefits at older ages.
83
Our analysis shows that it is at these older ages
when life expectancy differences predict that some income groups will
83
For a more complete discussion of our reasons, see appendix II.
Page 35 GAO-16-354 Longevity and Retirement
receive, on average, more or fewer years of benefits. However, in
appendix II, we also provide calculations with adjustments for present
value. These present value adjusted figures are consistent with our basic
findings—that differential life expectancy reduces the lifetime
progressivity of Social Security retirement benefits—though the
magnitude of the reduction in progressivity is somewhat smaller because
the adjustments discount the value of money received in the future.
Six studies we reviewed also examined the impact of life expectancy
differences by income group, and they also generally found that
differences in life expectancy by income erode the lifetime progressivity of
Social Security benefits.
84
For example, the 2015 National Academy of
Sciences study found that the lifetime retirement benefits advantage of
the top income quintile over the bottom income quintile had grown by
$70,000 (on a present value basis) because of increases in life
expectancy differences between 1930 and 1960. Moreover, when
considering lifetime benefits from additional government programs, the
study found that the change in life expectancy has made these programs
less progressive.
85
Another study, conducted for the National Bureau of
Economic Research in 2011, indicated that when differences in life
expectancy are taken into account, Social Security retirement benefits
may have become regressive for some groups. For example, the study
found that men in the 75th income percentile earned a higher rate of
return from Social Security (based on benefits received compared to
taxes paid) than do men in the 25th income percentile.
86
84
Three additional studies examined this topic but did not describe the distribution of
Social Security benefits. See appendix I for relevant studies.
85
The government programs in this study included Medicare, Medicaid, Social Security
(including retirement and Disability Insurance), and Supplemental Security Income.
86
Gopi Shah Goda, John B. Shoven, and Sita Nataraj Slavov, “Differential Mortality by
Income and Social Security Progressivity,” in Explorations in the Economics of Aging, ed.
David A. Wise (Chicago, IL: March 2011). Another study concluded that life expectancy
differences “work counter to Social Security’s statutory redistribution,” but it described the
effects as “modest at best.” Specifically, it found that the estimates of progressivity are
more affected by methodological factors used to estimate redistribution, such as how one
chooses to calculate net returns or classify subgroups. Amy Rehder Harris and John
Sabelhaus, How Does Differential Mortality Affect Social Security Finances and
Progressivity, Working Paper 2005-05 (Washington, D.C.: Congressional Budget Office,
May 2005).
Page 36 GAO-16-354 Longevity and Retirement
One frequently-cited option to address increasing average life expectancy
and Social Security’s long-term financial challenges is increasing the
early and full retirement ages.
87
While other options exist, such as
changing payroll tax contributions or the structure of benefits
, raising the
retirement age can be considered a direct response to increasing life
expectancy.
88
We adjusted our hypothetical scenario calculations to
illustrate the effect of increasing these retirement ages and found that
taking such action could more negatively affect lower-income individuals
because of their shorter life expectancy. Specifically, we calculated the
effect of increasing all retirement ages by 2 years and found that the
overall projected lifetime benefit is reduced more for lower-income men
than for higher-income men, given their different life expectancy.
89
For
example, compared to the amount of benefits received under current
program requirements, if retirement ages were increased by 2 years:
• A man in the lower-income group retiring at the increased full
retirement age would receive lifetime benefits that are reduced by the
equivalent of over two-thirds of his current annual income,
assuming he lived to the average age expected for his income group.
• A man in the higher-income group retiring at the increased full
retirement age would receive lifetime benefits that are reduced by the
87
As we reported in 2015, raising the early retirement age alone could worsen solvency for
the Social Security trust funds. GAO-16-75SP. In this report, we are not recommending or
endorsing the adoption of any particular policy option or package of options. Rather, we
identified options from existing literature and expert interviews as potential options that
could be considered.
88
We chose to examine increasing the retirement age in our scenarios for this reason and
because it was methodologically feasible, whereas other options would have required a
number of assumptions and calculations that we would not have been able to incorporate
into our methodology.
89
We adjusted our calculations so that the early and full retirement ages both increased by
2 years. For example, we assumed that the benefit amount received at age 62 (the current
early retirement age) would now be received at age 64. The maximum age at which
individuals could receive increased monthly benefits in this scenario increases from age
70 to age 72. Also, it is possible that, should the retirement ages be raised, there may be
changes to other aspects of the formula, such as to the benefit reductions for early
claiming or to the benefit increases for delayed claiming; however, for purposes of our
analysis, we assumed no other changes to the monthly benefit formula. Further, we did
not calculate changes to any retirement age in isolation because this was not possible
using the quick calculator. Finally, we wanted to limit the number of assumptions about
changes to the benefits formula that would be required by changing the early or full
retirement age in isolation.
Raising the Retirement
Age May More Negatively
Affect Lower-Income
Groups
Page 37 GAO-16-354 Longevity and Retirement
equivalent of nearly half of his current annual income, assuming
he lived to the average age expected for his income group.
A 2014 CBO study also examined the effect of raising the full and early
retirement ages and found that it would reduce lifetime benefits more for
lower-income groups than for higher-income groups, relative to payroll
taxes paid.
90
While the CBO study found that raising the early and full
retirement ages together resulted in a slight benefit decrease both for
lower- and higher-income individuals, it also found that, if life expectancy
disparities continue to increase, raising the retirement ages would lead to
larger declines in lifetime benefits for lower-income individuals than for
higher-income individuals, relative to the Social Security taxes they pay.
The 2015 National Academy of Sciences study similarly found that raising
the full retirement age would lead to proportionately lower lifetime benefits
for lower-income groups because of life expectancy differences.
Specifically, the study found that raising the full retirement age to 70
resulted in reducing lifetime benefits for men with income in the bottom
quintile by 25 percent, while reducing lifetime benefits for men with
income in the top quintile by 20 percent.
91
The National Academy of
Sciences study further reported that raising the early retirement age
together with the full retirement age would lead to similar results (a larger
benefit decrease for lower-income groups than higher-income groups).
92
While researchers sometimes suggest that workers could adjust to an
increased retirement age by working longer, our prior work has shown
that this may not be feasible for many who are low-income workers. In a
90
This study calculated the ratio of mean lifetime benefits to mean lifetime payroll taxes
(on a present value basis). Joyce Manchester, Michael Simpson, and Geena Kim,
Implications of Differential Mortality for Analyses of Social Security Policy Options,
Presentation to the 2014 Fall Research Conference of the Association of Public Policy and
Management (Washington, D.C.: Congressional Budget Office, Nov. 7, 2014).
91
This study calculated net present values of benefits (that is, benefits received minus
taxes paid) adjusted to age 50. Also, instead of comparing benefits to income, as we did,
this study examined progressivity by comparing the present value of net benefits to
wealth. For life expectancy estimates used in this study, see table 3 earlier in this report.
While these estimates differ from the estimates we used in our scenarios (Waldron, 2007),
the results are consistent with our finding that raising the retirement age would lead to
proportionately lower lifetime benefits for lower-income groups.
92
With respect to the early retirement age, the National Academy of Sciences study found
that raising it in isolation would make the Social Security retirement benefits slightly less
progressive.
Page 38 GAO-16-354 Longevity and Retirement
2014 report, we concluded that people who claim Social Security benefits
early, such as those with physically-demanding blue collar jobs, may have
done so because they faced challenges continuing to work at older
ages.
93
Similarly, in a 2010 report, we noted that many older workers
could face health or physical challenges that would prevent them from
working longer.
94
For example, in that report we found that the workers
who report more difficulty working longer and postponing retirement due
to work-limiting health conditions tend to have less education and lower
household income than those who do not report health limitations. For
these individuals, raising the early or full retirement age could erode an
important safety net.
Some policies have been proposed to mitigate the potential adverse
effects of raising the early or full retirement age on those with lower
incomes and shorter life expectancies.
95
For example, some researchers
have suggested making early or full retirement ages lower for those with
lower lifetime earnings, though others have suggested that this may be
difficult to implement.
96
Some experts we spoke with also suggested that
eligible, lower-income individuals could receive Disability Insurance to
bridge the gap created by raising the early retirement age, though the
Disability Insurance program is also under financial pressure.
97
As we reported in 2009, concerns about vulnerable populations have led
to proposals to restructure Social Security benefits to help these groups.
98
For example, we reported on proposals to guarantee a minimum benefit,
93
GAO-14-311.
94
GAO-11-125.
95
We did not evaluate these proposals or their effects, nor do we recommend or endorse
the adoption of any particular policy option or package of options. Rather, we identified
them from existing literature and expert interviews as potential options that could be
considered.
96
See for example Natalia Zhivan et al., An ‘Elastic’ Earliest Eligibility Age for Social
Security (Chestnut Hill, MA: Center for Retirement Research at Boston College, February
2008). See also Hilary Waldron, “Mortality Differentials by Lifetime Earnings Decile:
Implications for Evaluations of Proposed Social Security Law Changes,” Social Security
Bulletin, vol. 43, no. 1 (2013).
97
GAO-16-75SP.
98
GAO, Social Security: Options to Protect Benefits for Vulnerable Groups When
Addressing Program Solvency, GAO-10-101R (Washington, D.C., Dec. 7, 2009).
Page 39 GAO-16-354 Longevity and Retirement
supplement benefits for low-income single workers, or increase survivors
benefits. Another identified proposal would provide an additional Social
Security benefit to those over the age of 80 or 85, which may be
particularly helpful for low-income women.
99
These proposals could have
a negative effect on the projected long-term solvency of Social Security,
although compensating revisions could help moderate costs.
Therefore, in sum, proposals to address Social Security’s financial
challenges may affect different groups differently. Lower-income groups,
in particular, may be more adversely affected by certain proposed
changes because they are more reliant on Social Security retirement
benefits and because they have shorter-than-average life expectancy. It
is important that any proposals to change the Social Security program
take into account how disparities in life expectancy affect the total
benefits received by different groups over their lifetimes.
We provided a draft of this report to the U.S. Department of Labor, the
U.S. Department of the Treasury, the Internal Revenue Service, and the
Social Security Administration for their review and comment. SSA
provided comments, reproduced in appendix IV, agreeing with our finding
that it is important to understand how the life expectancy in different
income groups may affect retirement income. SSA also provided
technical comments, as did each of the other agencies, which we
incorporated as appropriate.
As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
report date. At that time, we will send copies to appropriate congressional
committees, the Secretary of Labor, the Secretary of the Treasury, the
Commissioner of the Internal Revenue Service, the Acting Commissioner
of Social Security, and other interested parties. In addition, the report will
be available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact
me at (202) 512-7215 or [email protected]. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
99
See also GAO-12-699.
Agency Comments
Page 40 GAO-16-354 Longevity and Retirement
the last page of this report. GAO staff who made key contributions to this
report are listed in appendix V.
Sincerely yours,
Charles A. Jeszeck
Director, Education, Workforce and Income Security
Appendix I: List of Selected Studies on Life
Expectancy Differences, by Income
Page 41 GAO-16-354 Longevity and Retirement
To examine the effect of life expectancy on the retirement resources for
different groups, especially those with low incomes, we analyzed 11
studies that estimated life expectancy or mortality for different income
groups and 9 studies that described the effect of these differences
regarding Social Security retirement benefits, and in some cases, the
studies also included Social Security disability benefits. These studies are
listed in table 4 below. We selected these studies based on our review of
longevity studies identified through expert referral and an Internet search,
focusing on those that were published in the past 10 years and that
included an analysis of effects by income groups. We limited our review
to those that were published by government agencies, research
organizations, or other scholarly publications, used data from accepted
sources (such as the University of Michigan Health and Retirement Study
or SSA administrative data), and had findings we determined were valid
for our purposes.
Table 4: Selected Studies on Life Expectancy Differences, by Income
Estimated life
expectancy or
mortality for different
income groups
Described the effect of
these differences
regarding Social
Security
Baker, Dean, and Rosnick, David. “The Impact of Income Distribution on the
Length of Retirement.” (Washington, D.C.: Center for Economic and Policy
Research, October 2010).
X
Bosworth, Barry P., and Burke, Kathleen. “Differential Mortality and Retirement
Benefits in the Health and Retirement Study.” (Chestnut Hill, MA: Center for
Retirement Research at Boston College, April 2014).
X
X
Cristia, Julian P. Rising Mortality and Life Expectancy Differentials by Lifetime
Earnings in the United States. Working Paper 665 (Washington, D.C.: Inter-
American Development Bank, January 2009).
X
Congressional Budget Office. The 2014 Long-Term Budget Outlook
(Washington, D.C.: July 2014).
X
Duggan, James E., Gillingham, Robert, and Greenlees, John S. Mortality and
Lifetime Income: Evidence from Social Security Records, Research Paper No.
2007-01 (Washington, D.C.: U.S. Department of Treasury, December 2006).
X
Goda, Gopi Shah, Shoven, John B., and Slavov, Sita Nataraj. “Differential
Mortality by Income and Social Security Progressivity,” in Explorations in the
Economics of Aging, edited by David A. Wise (Chicago, IL: University of
Chicago Press, March 2011): 189-204.
X
Goldman, Dana P., and Orszag, Peter R. “The Growing Gap in Life Expectancy:
Using The Future Elderly Model to Estimate Implications for Social Security and
Medicare,” American Economic Review: Papers & Proceedings, vol. 104, no. 5
(2014): 230-233.
X
X
Appendix I: List of Selected Studies on Life
Expectancy Differences, by Income
Appendix I: List of Selected Studies on Life
Expectancy Differences, by Income
Page 42 GAO-16-354 Longevity and Retirement
Estimated life
expectancy or
mortality for different
income groups
Described the effect of
these differences
regarding Social
Security
Harris, Amy Rehder, and Sabelhaus, John. “How Does Differential Mortality
Affect Social Security Finances and Progressivity.” Working Paper 2005-05
(Washington, D.C.: Congressional Budget Office, May 2005).
X
Manchester, Joyce, and Topoleski, Julie. “Growing Disparities in Life
Expectancy.” (Washington, D.C.: Congressional Budget Office, April 17, 2008).
X
Manchester, Joyce, Michael Simpson, and Geena Kim. “Implications of
Differential Mortality for Analyses of Social Security Policy Options:
Presentation to the 2014 Fall Research Conference of the Association of Public
Policy and Management.” (Washington, D.C.: Congressional Budget Office,
Nov. 7, 2014).
X
National Academies of Sciences, Engineering, and Medicine. The Growing Gap
in Life Expectancy by Income: Implications for Federal Programs and Policy
Responses. Committee on the Long-Run Macroeconomic Effects of the Aging
U.S. Population-Phase II. Committee on Population, Division of Behavioral and
Social Sciences and Education. Board on Mathematical Sciences and Their
Applications, Division on Engineering and Physical Sciences. (Washington,
D.C.: The National Academies Press, 2015).
X
X
Pijoan-Mas, Josep and Ríos-Rull, José-Víctor. “Heterogeneity in Expected
Longevities.” Demography, vol 51 (November 2014): 2075-2102.
X
Robert Wood Johnson Foundation. Overcoming Obstacles to Health (Princeton,
NJ: February 2008).
X
Society of Actuaries. RP-2014 Mortality Tables Report (Schaumburg, IL:
November 2014).
X
Waldron, Hilary. “Trends in Mortality Differentials and Life Expectancy for Male
Social Security-Covered Workers, by Socioeconomic Status.” Social Security
Bulletin, vol. 67, no. 3 (2007).
X
Waldron, Hilary. “Mortality Differentials by Lifetime Earnings Decile: Implications
for Evaluations of Proposed Social Security Law Changes.” Social Security
Bulletin, vol. 73, no. 1 (2013).
X
X
Source: GAO analysis of studies published in the last 10 years. | GAO-16-354
Note: In some cases the studies included both Social Security retirement and disability benefits.
Appendix II: Scenario Calculation Methodology
and Additional Examples
Page 43 GAO-16-354 Longevity and Retirement
To examine the effect of life expectancy on the retirement resources for
different groups, especially those with low incomes, we developed
scenarios to illustrate how disparities in average life expectancy by
income group affect the average amount of lifetime Social Security
retirement benefits received. While our report discusses various forms of
retirement resources, for our scenarios we compare only projected
lifetime Social Security benefits against current income. We do not factor
in other resources that an individual may draw upon in retirement, which
could include (but are not limited to) future payments from employer-
sponsored defined benefit plans, retirement savings accounts, or housing
equity. Scenarios that included these other retirement resources could
show different outcomes. However, we focused on Social Security
because it is the primary source of income for most people with lower-
incomes. Moreover, other retirement resources are much less prevalent
in this population.
1
We reviewed relevant studies and U.S. Census
Bureau (Census) data to determine our scenario assumptions, such as
life expectancy by income group, and we calculated monthly Social
Security benefits using the Social Security Administration’s (SSA) quick
calculator.
2
We chose to use the quick calculator because it is
transparent, publicly available, and produces quick, approximate
estimates using a methodology developed by SSA actuaries.
These scenarios are illustrative in nature and should not be used to
determine future outcomes for a particular individual. In addition to
gathering input from internal experts, we sought and incorporated
feedback on our methodology from one of the co-chairs for a recent study
on life expectancy by income by the National Academy of Sciences.
3
All
figures are in 2015 dollars. We assessed the reliability of the data we
used by reviewing relevant documentation and interviewing
knowledgeable agency officials. We found the data to be reliable for the
purposes used in this report.
1
GAO-15-419.
2
http://www.ssa.gov/oact/quickcalc/, accessed December 10, 2015.
3
National Academies of Sciences, Engineering, and Medicine. The Growing Gap in Life
Expectancy by Income: Implications for Federal Programs and Policy Responses
(Washington, D.C.: The National Academies Press, 2015).
Appendix II: Scenario Calculation
Methodology and Additional Examples
Appendix II: Scenario Calculation Methodology
and Additional Examples
Page 44 GAO-16-354 Longevity and Retirement
We made several assumptions in our scenario calculations, the most
important of which is the life expectancy estimate for income groups. We
identified and reviewed 11 relevant studies published in the past decade
(see app. I) and ultimately used the life expectancy estimates from a 2007
study by SSA’s Hilary Waldron.
4
We chose this study primarily because it
produced cohort life expectancy estimates at a number of ages at which
an individual can claim Social Security retirement benefits.
5
Other
advantages of the 2007 Waldron study are that it relies on comprehensive
data on Social Security-covered workers that is not generally available to
other researchers, it describes patterns over several decades, and it
measures earnings over a multi-year period rather than just over a single
year.
6
Moreover, the study’s life expectancy estimates are in-line with
other estimates
7
and they are used in two of nine studies we identified
that describe the effects of life expectancy disparities.
8
Although we found it sufficient for our purposes, the 2007 Waldron study
had some notable drawbacks. First, it produces estimates only for Social
Security-covered men. Despite this drawback, we believe the estimates
are appropriate for our purposes because the vast majority (94 percent)
of workers are covered by Social Security, according to SSA,
9
and
because a number of researchers have raised questions about the
reliability of life expectancy estimates by income group for women.
4
Hilary Waldron, “Trends in Mortality Differentials and Life Expectancy for Male Social
Security-Covered Workers, by Socioeconomic Status,” Social Security Bulletin, vol. 67,
no. 3 (2007).
5
“Cohort life expectancy” can be distinguished from “period life expectancy.” Period life
expectancy is a based on a cross-section, by age, of the mortality rates of a population
during a particular time period, and does not adjust for changes in mortality rates over
time. In contrast, cohort life expectancy is based on longitudinal estimates of the mortality
rates a population will experience over time, incorporating any expected improvements in
mortality rates over time. Cohort life expectancy is generally considered a more
appropriate estimate of how long a group can expect, on average, to live.
6
The study describes lifetime earnings as individual earnings between ages 45 and 55.
7
See table 3 in this report, which summarizes the life expectancy estimates of other
studies we considered. A few additional studies produced mortality estimates, which we
did not use in our scenario calculations.
8
See appendix I.
9
This is as of 2014, the most recent data available. Social Security Administration, Annual
Statistical Supplement to The Social Security Bulletin, 2014, SSA Publication No. 13-
11700 (Washington, D.C.: April 2015).
Life Expectancy Estimates
by Income
Appendix II: Scenario Calculation Methodology
and Additional Examples
Page 45 GAO-16-354 Longevity and Retirement
Second, the estimates are broken-out by those in the top and bottom half
of the earnings distribution. While it would have been useful to have a
finer break-out by earning groups, the estimates were sufficient for our
purposes to describe the effects on individuals with income at the 25th
and 75th percentiles (which we describe as lower- and higher- income,
respectively). One final drawback is that the study produces life
expectancy estimates for individuals born in 1941, who are now past
retirement age. It is possible that this cohort is different than past or future
cohorts. In particular, given that most studies we reviewed found
increasing disparities in life expectancy, our use of this study may
underestimate the effect of life expectancy differences for more recent
cohorts.
In order to calculate lifetime benefits using SSA’s quick calculator, we
assumed a set of characteristics for two hypothetical individuals, both
men (given the limitations of life expectancy estimates for women). One
individual was assumed to have an income in the bottom half of the
individual income distribution, and the other an income in the top half. For
the mid-point of each half of the income distribution (i.e., the 25th and
75th percentiles), we estimated income for men approaching retirement
age using Census’s 2015 Current Population Survey, the most recent
available.
10
Based on this, we used $20,000 annual income for our lower-
income group and $80,000 annual income for the higher-income group,
using income as a proxy for earnings.
11
The SSA quick calculator
assumes a prior earnings history based on current earnings covered by
Social Security, which we did not alter for transparency. Similarly, we
assumed no future change in earnings. For both individuals, we assumed
a birthday of 12/1/1953, which makes them 62 years old as of
12/1/2015.
12
Finally, for both individuals, we assumed a retirement date of
10
We estimated income for men ages 52 to 62 in order to capture multiple years of income
approaching the early retirement age.
11
Social Security retirement benefits are based on covered earnings from work (such as
wages and salaries). Earnings from work make up the bulk of income prior to retirement.
For our purposes, we grouped our scenarios by individual income rather than earnings.
12
Although we assumed a birth year of 1953, we also assumed the life expectancy
experiences of the 1941 cohort in order to incorporate the life expectancy estimates from
Waldron’s 2007 study, which examined the 1941 cohort.
Hypothetical Individuals’
Characteristics and
Analysis
Appendix II: Scenario Calculation Methodology
and Additional Examples
Page 46 GAO-16-354 Longevity and Retirement
December for a series of years beginning at age 62, the Social Security
early retirement age.
In order to further understand the effects of life expectancy differences on
income groups, we compared outcomes with and without taking life
expectancy differences into account. Specifically, we further calculated
lifetime benefits using SSA’s actuarially assumed (average) life
expectancy
13
and compared them to the benefits based on the life
expectancies by lifetime earnings group from Waldron’s 2007 study. We
describe the difference between these two outcomes as the change in
benefits due to differential life expectancy.
For simplicity and in order to focus on the effects of life expectancy
differences in the report, we did not adjust the lifetime Social Security
benefits for present value.
14
Present value calculations reflect the time
value of money, based on the assumption that a dollar in the future is
worth less than a dollar today because the dollar today can be invested
and earn interest. While present value adjustments are an important
economic tool, we chose instead to report unadjusted figures for several
reasons: for simplicity; so that average lifetime benefits could be viewed
as a multiple of current income; and in order to focus on the effects of
differential life expectancy, including the importance of benefits at older
ages. It is at these older ages when life expectancy differences predict
that some income groups will receive, on average, more or fewer years of
benefits, which is the crux of our analysis. Further, present value
adjustments were not incorporated by all of the studies we reviewed, and
one expert we consulted suggested that it would be valuable to show both
unadjusted and adjusted figures.
However, as a check on our analysis, and in order to provide more
complete information, we also performed our calculations with
adjustments for present value. The results of these calculations are
consistent with our basic finding—that differential life expectancy reduces
13
We used cohort life tables from SSA based on the intermediate assumptions of the 2015
Trustees Report. Specifically, we used the life expectancy estimates for the 1941 cohort in
order to be consistent with the Waldron study.
14
In addition, we did not compare benefits received to taxes paid. For more on payroll
taxes, see appendix III.
Lifetime Benefit Figures
Adjusted for Present Value
Appendix II: Scenario Calculation Methodology
and Additional Examples
Page 47 GAO-16-354 Longevity and Retirement
the progressivity of projected lifetime Social Security retirement benefits.
The lifetime benefit figures adjusted for present value are presented
below. The present value adjustments are based on an assumed real
(i.e., inflation-adjusted) interest rate of 2.9 percent, which is what SSA
used as the intermediate long-range assumption for the Social Security
trust funds in its 2015 Trustees Report.
15
Figure 7: Present Value Adjusted Lifetime Social Security Retirement Benefits
for Lower-Income Men
15
The 2015 Annual Report of the Board of Trustees of the Federal Old-Age And Survivors
Insurance and Federal Disability Insurance Trust Funds (Washington, D.C.: July 22,
2015).
Appendix II: Scenario Calculation Methodology
and Additional Examples
Page 48 GAO-16-354 Longevity and Retirement
Figure 8: Present Value Adjusted Lifetime Social Security Retirement Benefits for
Higher-Income Men
Appendix II: Scenario Calculation Methodology
and Additional Examples
Page 49 GAO-16-354 Longevity and Retirement
Figure 9: Change in Present Value Adjusted Lifetime Social Security Retirement
Benefits
Appendix III: Trend in the Cap on Social
Security Taxable Earnings
Page 50 GAO-16-354 Longevity and Retirement
Workers pay a payroll tax of 6.2 percent of their covered earnings into the
Social Security trust funds.
1
Their employers pay an equal amount, for a
combined total rate of 12.4 percent.
2
This tax only applies to workers’
earnings up to an annual limit; for 2016, it is $118,500. This cap is
technically known as the “contribution and benefit base” because the
same cap is used to limit the amount of earnings subject to the payroll
tax, as well as the amount of earnings used in the formula to determine
benefit levels.
The cap on taxable earnings has changed over time. The maximum
annual earnings subject to the payroll tax was $3,000 in 1937. However,
in 1937, 97 percent of all covered workers had total earnings below that
level. In recent years, about 94 percent have had total earnings below the
taxable maximum. Meanwhile, the percentage of covered earnings that
are subject to the payroll tax has fluctuated before generally declining
since the mid-1980s, according to the most recent data available. In
1983, this figure was more than 90 percent, but it has declined since then
and, in 2013, about 83 percent of earnings fell below the taxable
maximum (see fig. 10). This percentage has declined because earnings
among higher earners (those earning above the maximum) have grown
faster than earnings among the rest of the working population.
3
1
Covered earnings include wages and salaries, but not earnings on investments. Also, a
portion of the payroll tax is allocated to the Disability Insurance (DI) trust fund and the
remaining portion is allocated to the Old-Age and Survivors Insurance trust fund. The
Social Security Benefit Protection and Opportunity Enhancement Act of 2015 increased
the proportion of these taxes that specifically go to the DI trust fund from 1.8 percent to
2.37 percent starting in 2016 through the end of 2018. Pub. L. No. 114-74, tit. VIII, 129
Stat. 584, 601-20.
2
Self-employed workers pay 12.4 percent, but they are allowed an income tax deduction
for half of the payroll tax.
3
Kevin Whitman and Dave Shoffner, The Evolution of Social Security’s Taxable Maximum,
Policy Brief no. 2011-02 (Social Security Administration, September 2011).
Appendix III: Trend in the Cap on Social
Security Taxable Earnings
Appendix III: Trend in the Cap on Social
Security Taxable Earnings
Page 51 GAO-16-354 Longevity and Retirement
Figure 10: Percentage of Covered Earnings Subject to the Social Security Payroll
Tax, 1975-2013
Notes: According to SSA, from 1937 through 1975, the taxable maximum was increased on an ad-
hoc basis and since 1975, the taxable maximum has generally increased at the same rate as average
wages each year. Data from 2010 and 2011 are preliminary. Taxable earnings from 2012 are
preliminary estimates based on Social Security data; employment data for that year are preliminary
estimates based on data from the Bureau of Labor Statistics. Data from 2013 are preliminary
estimates based on data from the Bureau of Labor Statistics and the Bureau of Economic Analysis.
Appendix IV: Comments from the Social
Security Administration
Page 52 GAO-16-354 Longevity and Retirement
Appendix IV: Comments from the Social
Security Administration
Appendix V: GAO Contact and Staff
Acknowledgments
Page 53 GAO-16-354 Longevity and Retirement
Charles A. Jeszeck, (202) 512-7215 or [email protected]
In addition to the contact named above, Margie K. Shields (Assistant
Director), Margaret Weber (Analyst-in-Charge), Laura Hoffrey, and
Vincent Lui made key contributions to this report. Also contributing to this
report were Susan Aschoff, Deborah Bland, Mindy Bowman, Alicia
Puente Cackley, Sarah Cornetto, John Dicken, Jennifer Gregory, Kathy
Leslie, Sheila McCoy, Drew Nelson, Mimi Nguyen, Susan Offutt,
Rhiannon Patterson, Oliver Richard, Max Sawicky, Joseph Silvestri,
Frank Todisco, and Walter Vance.
Appendix V: GAO Contact and Staff
Acknowledgments
GAO Contact
Staff
Acknowledgments
Related GAO Products
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(131335)
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