Death and taxes: longer life, consumption, and social security

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Citation: Lee, R., Tuljapurkar, S. (1997) Death and taxes: longer life, consumption, and social security. Demography (RSS)
Internet Archive Scholar (search for fulltext): Death and taxes: longer life, consumption, and social security
Tagged: uw-madison (RSS), wisconsin (RSS), sociology (RSS), demography (RSS), prelim (RSS), qual (RSS), WisconsinDemographyPrelimAugust2009 (RSS)

Summary

In this paper, Lee and Tuljapurkar focus on the influence of mortality decline on the long run finances of the Social Security System, excluding Medicare. They argue that it is appropriate for future generations to pay more in taxes to help finance consumption during the longer years of retirement that they will enjoy due to lower mortality. Alternatively, future generations could postpone retirement and leave taxes for pensions unchanged, or they could reduce benefit levels. But longer life is costly because incremental years lived come largely at ages that are traditionally spent in leisure; so the life cycle value of consumption needs and Social Security benefits automatically rises considerably, while the life cycle value of earnings and tax contributions rises much less. Lee and Tuljapurkar have calculated that over the long run, each additional year of life expectancy must cost about 0.8% of consumption at each age, or about 0.8% of leisure. If they restrict their attention to the Social Security system, each additional year of life expectancy requires a 3.6% increase in the payroll tax rate, or a 3.6% reduction in benefits, in relation to their initial levels. Actuarial fairness requires that the longer lived generations pay the costs. Costs, however, depend on future gains in life expectancy. According to a simulation using the SSA projection of a 5-year gain by 2070 and SSA fertility assumptions, the balanced budget tax rate would have to rise from 12% not to 20% in 2070. Based on Lee and Carter's forecast of a 10-year gain in life expectancy by 2070, the tax rate would have to rise to 24%. If life expectancy rose to 90 or 100 years by 2070, the balanced budget tax rate would have to rise to 27% or 30% of taxable payroll. An alternative that seems more likely is that benefits would have to be correspondingly reduced, perhaps through major increases in the age at retirement.