The U.S. Retirement System

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). Increasing Life Expectancy Adds to Challenges for Retirement Planning

The projected continuing increase in life expectancy for both men and  women in the United States contributes to longevity risk in retirement  planning. To help address the long-term financial challenges facing the Social  Security retirement program, various changes have been made over the  years. In addition, a wide range of options to adjust Social Security further have  been proposed. 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. Life Expectancy Disparities Negatively Affect Retirement Resources for Lower- Income Groups

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. Lower-Income Groups’ Life Expectancy Has Not Increased as Much as Higher-Income Groups’ Life Expectancy

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. Differences in Life Expectancy Result in Reduced Projected Lifetime Social Security Benefits for Lower-Income Groups

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. Lower Projected Lifetime Benefits Result in Reduced Progressivity

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. 6). 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. 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. GAO staff who made key contributions to this  report are listed in appendix V.

Appendix I: List of Selected Studies on Life Expectancy Differences, by Income

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. Appendix II: Scenario Calculation Methodology and Additional Examples

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. 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. GAO-14-310. GAO-12-445.
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.
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.