Why is this Topic Important to Wealth Managers? This blog presents an interesting perspective of the relationship between earnings and life expectancies. As applied to clients, wealth managers may consider the data presented herein to discuss the weight that may be applied to life spans in consideration of client earnings with regards to retirement planning.  If wealthy clients have longer life expectancy, correspondingly wealthy clients are more likely to face the question: What if I outlive my retirement planning?

A topic that is now of recent relevancy is the correlation between lifetime income earnings and life expectancies as the Nation’s ability to cover Social Security costs teeters on the edge. Studies show that there is actually a correlation between earnings and how long someone lives. [1]

Nevertheless, it is generally the case that the calculation of initial benefits in the U. S. Social Security system makes no attempt to reflect systematic differences across the population in mortality risk. Individuals of the same age with identical lifetime earnings profiles, and therefore with identical contribution amounts, receive the same initial benefit at retirement irrespective of differences in expected length of life.    

However, many economists, sociologists, demographers, and health professionals have all studied the relationship between life expectancy and socioeconomic status, with the volume of literature growing dramatically since the oft-cited study of Kitagawa, E. and P. Hauser. [2] A common finding is that life expectancy is higher for higher income persons and some research reports that the gap in mortality risk has actually been growing. [3]

A Department of Treasury Study notes the effect of income (or socioeconomic status generally) on mortality cannot be determined a priori. Higher income may be associated with higher mortality if the consumption of some goods and services that adversely affect health (red meats or skydiving, for example) increases with income. On the other hand, higher income may lead to increased consumption of goods and services that support health and prolonged life, such as shelter, protective clothing and medical care. [4]  The relationship between income and mortality is complex, but the Study’s authors contend as a hypothesis, that they expected larger improvements in life expectancy to result from income increases at the lower end of the income distribution than at the upper end.

The Study was conducted by using data sources from the Social Security Administration’s 2002 Continuous Work History Sample and Master Beneficiary Record. The two data sources considered over three million current or former workers in covered employment spanning the period from 1937 to 2002. 

The Study found strong empirical support to a negative relationship between individual lifetime income and mortality.  In other words, for black and white males and females the difference in age of death between low and high lifetime income is on the order of two to three years.  Workers with positively-trended earnings over their work life may live an additional six to eighteen months relative to those with declining earnings. Further, the authors’ contention held true when they found income-related mortality differences between blacks and whites were the largest at low-income levels, particularly for males, and narrow substantially at higher income levels. [5]

The income-mortality relationship has implications for a wide range of Social Security program rules. For example, many reform proposals include a provision to raise the normal retirement age or to increase the early retirement age. Analyses of such proposals that do not account for the effect of income on life expectancy will misrepresent the differential effects of these proposals on those persons who currently retire early compared to those who retire at later age.

Does this mean those who earn more could be subject to higher Social Security taxes to pay for their longer lives? We’ll just have to wait and see.

Tomorrow’s blogticles will continue to discuss topics relating to financial planning.   

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[1] James E. Duggan ,  Robert Gillingham, John S. Greenlees. Research Paper No. 2007-01. “Mortality and Lifetime Income  Evidence from Social Security Records”.  December 2006. http://www.treasury.gov/resource-center/economic-policy/Documents/rp2007-01.pdf. Last Accessed 3/13/2011.

[2] See of Kitagawa, E. and P. Hauser.  “Differential Mortality in the U. S.: A Study of Socioeconomic Epidemiology”.  Cambridge: Harvard University Press. 1973.

[3] See Brown, J., “Differential Mortality and the Value of Individual Account Retirement Annuities,” in M. Feldstein and J. Liebman, eds., The Distributional Aspects of Social Security and Social Security Reform, Chicago: University of Chicago Press , 2002, pp. 401-440; Schalick, L. M., Hadden, W. C., Pamuk, E., Navarro, V., and Pappas, G. (2000), ‘The Widening Gap in Death Rates among Income Groups in the United States from 1967 to 1986’, International Journal of Health Services, 30/1: 13-26.

[4] Research Paper No. 2007-01.

[5] Research Paper No. 2007-01.