Longevity Insurance: Strengthening Social Security for People Age 82 and Older

John A. Turner
Director, Pension Policy Center

People in their 80's with low Social Security benefits are economically vulnerable. Few are able to compensate for a loss of non-Social Security income through work. People in this age group may not have sufficient resources to enjoy the last years of their lives with dignity.

Policymakers should add longevity insurance that targets beneficiaries age 82 or older with low Social Security benefits and long work histories to our current Social Security program. Age 82 is approximately the average life expectancy at age 65. Elderly poverty is high among this age group—a third higher than for people age 65-69. People in this age group are at risk of having fallen into poverty even though they had not been poor earlier in life. They have greater difficulty leaving poverty than people at younger ages. Strengthening Social Security for this group would provide cost effective social insurance.

Longevity insurance is a deferred annuity that starts at an advanced age. Much of the utility value to workers of annuitization comes from insuring against the possibility of running resources down to a very low level if one lives to be older than expected.

The longevity insurance benefit proposed here is a delayed annuity paid in the form of a minimum Social Security benefit or an enhanced Social Security benefit starting at age 82. Qualifying persons receiving a Social Security benefit below a minimum level would have their benefit raised at that age. Recognizing this enhanced insurance protection, Social Security OASI would be renamed Old-Age, Survivors and Longevity Insurance (OASLI). The renaming would inform people about the benefit. This “framing” would help people focus on and better understand the economic risk of living longer than their life expectancy.

In addition to serving as an enhanced insurance benefit, longevity insurance can simplify the problem of planning asset decumulation in old age. Some retirees have difficulty planning the spend down of their financial resources because of the uncertainty of age at death. With a longevity insurance benefit, that problem is simplified. Instead of planning for an uncertain period, they can plan for the fixed period from the date of their retirement to age 82, the date at which they start receiving the longevity insurance benefit.

Longevity insurance can be an important component of a policy package to restore Social Security solvency. Public policy changes likely will reduce the generosity of Social Security old-age benefits as part of a package to restore solvency. Most reform packages that cut benefits raise elderly poverty. To offset that effect, there will be a need to increase the generosity of some benefits to better target benefits to vulnerable groups. That goal could be achieved by providing longevity insurance benefits. This policy shifts Social Security resources toward persons who are both old and have low incomes.

As an alternative, survivors’ benefits could be raised, but that would be less targeted and thus more expensive for achieving the same results for vulnerable persons. Another alternative would be to raise minimum benefits, with the benefits being available at an earlier age, such as age 62. Longevity insurance would be better targeted by age. As life expectancy continues to increase, age 62 has become a relatively younger age compared to expected age at death. Further, providing minimum benefits at an earlier age would more likely affect labor supply.

To read the full proposal, click here.