Longer Lifespans Challenge Conventional Social Security Wisdom

Conventional wisdom has it that lower-income workers should get the most out of Social Security, but that’s not necessarily the case given uneven increases in longevity across income groups.

While significant increases in life expectancy have redefined what it means to work and retire in American society, life expectancy has not increased uniformly across all income groups, the Government Accountability Office (GAO) warns in a new report.

This fact has important consequences for retirement policy, the GAO says, as proposed actions to address the effects of greater longevity in the work force will likely impact lower-income and higher-income individuals differently. Especially when it comes to reforming Social Security, the GAO says it is vitally important to understand the interplay of income, longevity and total lifetime benefits. 

“Life expectancy varies substantially across different groups with significant effects on retirement resources, especially for those with low incomes,” the GAO writes. “For example, according to studies the GAO reviewed, lower-income men approaching retirement live, on average, 3.6 to 12.7 fewer years than higher-income men.”

Conventional wisdom says such an individual will get more out of Social Security over time compared with his higher-income counterpart. But the GAO says it wanted to go deeper, and so it also “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, the 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 actually reduced their projected lifetime Social Security benefits by as much as 11% to 14%. This cuts directly against the conventional wisdom, the GAO observes. 

“Effects on Social Security retirement benefits are particularly important to lower-income groups because Social Security is their primary source of retirement income,” the GAO explains. “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 benefits received over a lifetime, the disparities in life expectancy across income groups erode the progressive effect of the program.”

The full report is presented here.