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ISSUES > Retirement Income & Social Security
March 27, 1998
Social Security's Rate of Return For Hispanic Americans
by William W. Beach and Gareth G. Davis
Center for Data Analysis Report #98-02 (In Spanish)
| What can Hispanic Americans expect in future Social Security retirement benefits? A Heritage Foundation study reveals that the Social Security system's rate of return for most Hispanic Americans will be vastly inferior to what they could expect from placing their payroll taxes in even the most conservative private investments. -
Social Security's low rate of return cost Hispanic Americans potential retirement savings. If Hispanic Americans were allowed to direct their payroll taxes into safe investment accounts similar to 401(k) plans, or even in super-safe U.S. Treasury bonds, they would accumulate far more money in savings for their retirement years than they are likely ever to receive from Social Security. For example, an average-income single Hispanic male born in 1975 who earned about $17,900 in wage, salary, and self-employment income in 1996 can expect to receive an annualized real rate of return from Social Security of just 1.44 percent. By contrast, he could expect to receive a long-run real rate of at least 2.8 percent from super-safe long-term U.S. Treasury bonds. -
Social Security also pays a very low rate of return for two-income Hispanic households with children. A Hispanic, double-income couple that has two children, that was born in 1965, and that earns the average wages received by Hispanic Americans1 can expect a rate of return of 2.17 percent from Social Security during its lifetime. This rate contrasts with a return of 3.17 percent over the same period on an ultra-conservative portfolio composed of 100 percent U.S. Treasury bonds, or a return of 4.67 percent on a prudent portfolio made up of 50 percent broad market equities and 50 percent U.S. Treasury bonds. In terms of 1997 dollars, this couple could expect to receive $347,000 more in lifetime after-tax income from a portfolio composed equally of government bonds and broad market equities than it could from Social Security. -
The rate of return has a damaging impact on communities. The cumulative effects of Social Security's low rates of return can be appreciated by considering a hypothetical community. Suppose there existed a city composed entirely of 50,000 young, married, double-earner Hispanic couples in their 30s in which each person earned the average wage for Hispanics and each couple had two children. The cumulative amount such a community could save in a private pension plan by retirement with the same dollars they currently pay in Social Security taxes is more than $12.8 billion greater in 1997 dollars than what these couples will get in Social Security benefits. This amount is roughly equal to half that the federal government currently spends on food stamps each year for the whole country and half as much as direct federal spending on education.2 How a Small Difference in Returns
Means Big Differences in Cash The power of compound interest over a career can translate even small differences in the rate of return into large swings in lifetime savings. Consider, for example, a young Hispanic male born in 1975. If in 1998 he were to invest $1,000 at the real rate of return he can expect to receive from Social Security (1.44 percent), this amount would have grown a mere $876?a total of $1,876?by the time he reached age 67. By contrast, if he received a rate of 4.25 percent (a conservative estimate of the return to a mixed bond-equity portfolio), his investment would increase more than sixfold?to $6,242. Using the same logic, what appear to be small differences in the rate of return results in large differences in net wealth. Consider the case of a two-earner average Hispanic family, in which each spouse was born in 1965: - Such a family can expect to receive a real rate of return of 2.17 percent from Social Security.
- Investing the couple?s Social Security taxes instead in U.S. Treasury Bonds would yield a rate of 3.17 percent during the working lives of the couple. This difference of one percentage point translates into a $106,000 lifetime benefit over Social Security.
- Investing in the mixed bond-equity portfolio would yield a real rate of return of 4.67 percent for the couple. This difference of 2.5 percentage points in the real rate of return would result in a level of after-tax retirement income approximately $346,700 greater than Social Security benefits could provide.
Social Security's rate of return for retirement is crucially important to anyone interested in making plans for an adequate income in old age. If the rate nearly equals what one could achieve from stocks and bonds, then it may make sense to devote current savings to other things beside retirement. But retirement rates of return from Social Security that are significantly poorer than returns from bonds or stocks, even after adjusting for inflation and risk, mean that more current savings need to be allocated to future retirement needs. The ability of individuals to make this important decision depends on seeing clearly their retirement rate of return from Social Security. The Heritage Foundation's estimates of the rate of return facilitate this clarity by referring only to that portion of Social Security that provides retirement income. We remove the non-retirement components of Social Security by subtracting pre-retirement survivors benefits and the taxes that support this separate insurance program from the retirement rate of return calculations. Similarly, Heritage does not included disability insurance taxes or benefits in its retirement rate of return estimates. Heritage assumes that both the survivors and disability programs will continue unaffected by the privatization of the retirement portion of payroll taxes. The Appendix explains the methodology of Heritage analysts more completely. The defenders of Social Security argue that rates of return are irrelevant to the Old-Age and Survivors Insurance (OASI) portions of the program. Social Security, they suggest, was intended to provide a basic, but decent, retirement income to beneficiaries and stopgap incomes for surviving spouses. Future Social Security beneficiaries, they argue, should be saving now for additional retirement income to supplement benefits from the OASI. Thus, they contend, comparing rates of return on private pension investments with those from a public program intended to pay out during retirement at least 35 percent of the wages an average worker earned prior to retirement is like comparing apples to oranges.3 This line of reasoning contains a fundamental flaw. If Social Security taxes were low enough to allow workers to save these additional dollars for their retirement, then it is conceivable that apologists for the system might be correct in characterizing Social Security as a pension program of last resort. But Social Security taxes are not low, and they are crowding out the ability of most low- and middle-income Americans to save for retirement. Thus, the rate of return on these taxes is very important, especially for those Americans for whom Social Security is their main retirement savings. Crowding Out Savings As payroll taxes have risen, many more Americans have fewer dollars left over for supplemental retirement investment. Over the past 25 years, Congress and the President have increased Old-Age and Survivors benefits so often and so much that today the high payroll taxes needed to pay those current benefits crowd out private retirement investments.4 In 1972, the average worker (with his or her employer) paid 8.1 percent in Old-Age and Survivors payroll taxes on the first $9,000 of wages and salary (equivalent to about $21,500 in 1997 dollars);5 in 1997, that worker paid 10.7 percent on the first $65,400 of "earned" income (or the first $27,340 in 1972 dollars).6 Moreover, between 2020 and 2046, the Old-Age and Survivors tax rate would have to rise to 14.4 percent from today's 10.7 percent if benefit costs are not cut.7 Because of rising payroll taxes for retirement, increasing numbers of poor and middle-income workers do not have the after-tax funds needed to create private supplemental pension investments.8 In fact, Social Security taxes now consume as much of the average family's budget as do outlays for housing and nearly three times more than annual health care expenses.9 Key Assumptions and Methodology
(for details, see Appendix) - "Rate of Return" is a statistic commonly used to measure the income performance of an investment. It represents the annual rate of increase in the value of an investment and usually is expressed in percentage terms.
- All calculations are adjusted for inflation.
- Both the employee?s and employer?s share of payroll taxes are included in the calculations.
- Unless otherwise noted, after-tax Social Security benefits and private investment returns are used for comparisons. That is, applicable federal income taxes have been subtracted from Social Security retirement benefits (in the few cases in which those benefits are taxable) and from the retirement incomes derived from private retirement savings.
- In order to focus just on the individual retirement issues surrounding Social Security, the estimated insurance cost of pre-retirement survivors benefits is subtracted from OASI payroll taxes. Thus, only retirement income taxes and benefits are compared. Likewise, Heritage?s Social Security model assumes no change in disability insurance under any of the alternative scenarios described in this paper. Holding "constant" disability insurance payments means that the rates of return in this paper reflect just the retirement portion of Social Security?s many programs. Heritage?s Social Security model, too, holds constant the pre-retirement survivors benefits and taxes that support this program.
- Future increases in life expectancy and wages are taken into account and, unless otherwise stated, are consistent with the intermediate assumptions of the Board of Trustees of the OASI trust fund.
- Unless otherwise indicated, the "private" investment alternatives described in this study are based on tax-deferred accounts similar to individual retirement accounts (IRAs), but with initial contributions that are not tax-deductible.
The declining rates of return and mounting tax burdens implied by the current system disproportionately affect the comparatively youthful Hispanic population. Social Security tax rates would have to increase by about 40 percent between now and 2050 just to keep the system solvent for all Americans. The U.S. Bureau of the Census estimates that Hispanics in 2050 will comprise almost 25 percent of those in the economically active 18- to 66-year-old population (compared with 11 percent in 1997) but only 17 percent of those aged 67 and over. These percentages mean Hispanic workers will bear a proportionately larger share of the Social Security tax burden than they do today.10 Because of the long-term financial problems of the Social Security trust fund, today's calculations of the rate of return for Social Security are likely to prove optimistic for future generations. The fact is that Social Security will not be able to pay out old-age benefits to the "Baby Boom" generation without additional tax increases on workers or cuts in benefits. These tax increases or benefit cuts will reduce the Social Security rates of return further for those workers currently in their 20s--members of the so-called Generation X--and their children. As Social Security's rates of return fall, the relevance of rates of return on private pensions rises. That is, members of Generation X simply will not ignore the decaying prospects for adequate income during their retirement years; instead, they will insist increasingly on greater opportunities for creating pensions to supplement Social Security's Old-Age benefits. Thus, comparing rates of return for private and public pensions will become even more important to each subsequent generation. In addition, the rate of return is important because the crowding-out effects of high Social Security taxes on private savings for low- and middle-income workers affect the wealth that can be left to the next generation. Few aspects of Social Security are as unintended or as damaging to low- and middle-income workers as the squeeze that high payroll taxes put on the formation of intergenerational transfers of wealth. The inability of poor workers to accumulate enough savings to leave a nest egg to their children can mean that their children will be as dependent as their parents could be on their monthly Social Security check. It means that poor communities will not have as much "home-grown" capital with which to create new jobs and sources of income. Without these new jobs and income, members of the next generation will be less able to save for retirement than they could be. Thus, by taxing away one generation's opportunity to help the next generation start earning at a higher level, the Social Security system acts as a drag on future generations. Cumulative Effect on Communities Although a low rate of return on rising Social Security taxes reduces the potential retirement savings of individual households, it is important to appreciate its cumulative effect on communities. In both rich and poor communities, less money accumulated in each household for retirement years means less money in the community not just for living expenses but also for new businesses, for sending children to college, and generally for giving the next generation a more secure financial foundation. In short, each succeeding generation in a community is weakened financially by a poor rate of return from Social Security. For a very rough picture of the cumulative impact on a community, consider a hypothetical small community of 200,000 Hispanic residents. In this imaginary community, there are 50,000 families of four; all the parents are 30 years old; and both parents work, earning the average income of Hispanics ($17,911 in 1996). Assume that no one migrates into or out of this community. In this greatly simplified hypothetical community, the difference between the lifetime amount of savings the parents would accumulate by placing their Social Security tax dollars in conservative portfolios by retirement and the amount actually obtained from Social Security would be approximately $12.8 billion in 1997 dollars (based on family cases analyzed later in this study).11 This is the savings they must forego because of the failing Social Security tax system and, in effect, is money drained from their community during their working years. To be sure, this example is completely fictitious and actual calculations for real communities would vary widely. But this example serves to illustrate that the deficiencies of Social Security for individual households imply a significant impact on the long-run financial health of communities across the United States. Social Security's Rates of Return for Hispanic Families The Heritage Foundation has calculated Social Security's inflation-adjusted (or "real") rates of return for various segments of the Hispanic population and compared these returns with the rates of return workers could receive if they were allowed to invest their Social Security taxes in safe, private retirement investments.12 These calculations show that Hispanic families of many types receive relatively low returns for the lifetime taxes they pay. Defenders of Social Security often argue that Old-Age and Survivors benefits help low-income workers especially. But do they? Does Social Security give many Hispanic Americans a decent retirement return on all of the taxes they pay into the system over their lifetime of work?13 As Chart 1 indicates, a Hispanic family earning the average wages received by Hispanic Americans is likely to receive at best a mediocre and at worst a very poor real rate of return from Social Security, despite the fact that Social Security's formulae are designed expressly to redistribute income toward retirees with average- and low-income work histories. Single-earner average-income couples born before 1935, who have paid much lower lifetime payroll taxes, fare better than do much younger workers. Even the best-case rate of return (4.9 percent for a single-earner couple with children in which the worker was born in 1932), however, lies below 7 percent, a conservative estimate of what economists consider the long-range real rate of return on equities to be.14 Every other average-income group lies below this rate of return, or well below the rates of return available to Americans who have opportunities to invest in stocks and bonds for the long term. Double-earner, average-income families, as well as single, average-income males and females, fare poorly under Social Security. Average-income, single Hispanic males are hit particularly hard because of the lower male life expectancy and the absence of spousal and survivors benefits. The expected real rate of return from Social Security for average-income males falls from a high of 3.4 percent for those born in 1935 to 1.4 percent for those born in 1975--well below what could be realized from a prudent private investment portfolio.
Table 1 shows Social Security's rates for return for selected birth years. What Do These Rates of Return Mean in Dollar Terms?
Because of the power of compound interest, even what appears to be a relatively small difference in the real rate of return can have significant implications for a Hispanic family's lifetime accumulated wealth. In order to analyze the dollar implications of Social Security's lower rate of return, the authors calculated the inflation-adjusted differences between Social Security's benefits and what a fairly conservative investor could accumulate by retirement from a portfolio split equally between long-term U.S. Treasury bonds and broad market equity funds.
An average-income, two-earner couple (both aged 32 years in 1997) with two children can expect to receive about $420,400 in Social Security benefits in return for a lifetime of payroll taxes. By investing these same tax dollars in a portfolio made up of 50 percent U.S. Treasury bonds and 50 percent blue-chip equities, however, this couple could command an estimated $767,100 of after-tax retirement income in 1997 dollars. 15 Even an investment portfolio composed entirely of intermediate and long-term U.S. Treasury bonds outperforms Social Security: By the time of retirement, this couple would generate a lifetime retirement post-tax income of $526,400.
Hence, staying in the Social Security program means that average-income, married Hispanic couples in this age group will bear costs between $106,000 and $346,700 in retirement savings they could have enjoyed if current law had given them the ability to invest their payroll taxes in super-safe U.S. Treasury bonds or in a prudent mix of Treasury bonds and high-grade equities. These dollar differences, depicted in Chart 2, translate into significant differences in rates of return. Social Security "produces" a 2.17 percent inflation-adjusted rate of return for this couple. If the couple invested its payroll taxes entirely in Treasury bonds, however, they would receive a return rate of 3.17 percent while an even mix of bonds and equities would produce an annualized return of 4.67 percent.
This couple's gains under the mixed portfolio option in Chart 2 are such that this average-income Hispanic couple could take its retirement savings and convert this amount into an annuity upon retirement that paid exactly the same as Social Security promises to pay--and still have approximately $205,000 left in their accumulated savings at age 67 to bequeath the children. 16 This amount could be used to start a business, pay for education or health care, or, indeed, to seed the retirement security of the next generation. Conclusion
When the Social Security system began, its aim was to help ordinary Americans and those in disadvantaged positions to have adequate financial security in their retirement years. As this analysis and other Heritage studies have shown, 17 however, the current Social Security system actually may decrease the lifetime well-being of many socioeconomic groups, even under the most favorable assumptions. Among the groups that will lose out under the current system are Hispanics, single mothers, low-income single males, average-income-married couples with children, and even affluent professionals. Indeed, many ordinary Americans already understand that the Social Security system is a bad deal. Recent surveys have shown that many workers anticipate paying more, in real terms, into the system than they ever expect to receive in retirement benefits. 18
This analysis of the Social Security system almost certainly underestimates its total economic costs for Hispanic Americans. It makes no attempt, for example, to include the benefits from faster economic growth, higher wages, and increased employment generated by a retirement program in which individuals are allowed to invest their Social Security tax dollars and build the wealth necessary to sustain them in their old age.
Although the debate on Social Security reform at times may focus on technical terms (such as the "replacement ratio" and the trust fund's "long-range actuarial balance") that mean little or nothing to ordinary American families, there is little doubt that the outcome of the debate will be profoundly important to them. For example, regardless of whether the current system will continue to exist--perhaps sustained by cuts in benefits and tax increases in taxes--is a matter of great concern to the 22-year-old Hispanic described earlier or to the 30-something Hispanic couple struggling to accumulate enough wealth to give itself and its family a better life.
For almost every type of worker and family, retirement under Social Security means receiving fewer dollars in old age and passing on less wealth to the next generation than that individual could if he were allowed to place his current Social Security tax dollars in private retirement investments.
William W. Beach is John M. Olin Senior Fellow in Economics at The Heritage Foundation and Director of Heritage's Center for Data Analysis.
Gareth G. Davis is a former Research Assistant at The Heritage Foundation.
APPENDIX:
BASIC ASSUMPTIONS AND METHODOLOGY
The authors of this study utilized The Heritage Foundation's Social Security Rate of Return Microsimulation Model to compare the benefits different types of families can expect to receive from the OASI with the Social Security taxes they pay during their working lives.
The Heritage model treats taxes paid over a worker's lifetime as a series of investments. Social Security's rate of return is the rate of return on payroll taxes that would buy an annuity equal in value to the Social Security benefits payments. This yield is the difference between Old-Age and Survivors benefits payments (after subtracting any applicable income taxes) and the amounts paid to the OASI trust fund through payroll taxes. Throughout the model and this paper, all amounts are adjusted for inflation and expressed in terms of 1997 purchasing power. 19
The Heritage Foundation model includes both portions of OASI taxes: The share paid by employers and the share paid directly by the employee. In calculating the return, however, an amount is removed from taxes paid that is equal to the premium on a term life insurance policy that has the same value as benefits that are paid to children of workers (and the spouse caring for their children) who die before retirement. This means the calculations are not unfair in including the cost of the spousal benefit when figuring the rate of return in terms of retirement income. Heritage analysts also assume that, from 2015, tax rates will increase by the amount that the Board of Trustees of the Social Security Administration consider necessary to finance the OASI benefits contained in current law.
The earnings to which OASI tax rates are applied are based on a proportion of the Social Security Administration's average wage index. Average-income Hispanic workers are assumed to earn 69.63 percent of the average wage index. Past values of this wage are taken from historical data contained in the Board of Trustees' 1997 annual report, and future wage growth is based on the Trustees' best guess of what the rate of increase in the average wage will be. All workers are assumed to begin work on their 21st birthday and to continue to work right up to the age at which they become entitled to Social Security's full Old-Age and Survivors benefit. For those retiring in 1997, this is age 65; but under current law, this retirement age is scheduled to increase gradually until reaching 67 for those born in 1960 and later.
The model calculates post-retirement Old-Age and Survivors benefits to individuals according to formulae stipulated in current law and the "best-guess" economic assumptions contained in the 1997 Annual Report of the Board of Trustees, up to the date on which their life expectancy expires. Neither Disability Insurance taxes nor benefits are included in the model.
The model uses life expectancies drawn from the National Center for Health Statistics' 1992 Life Tables for the United States. 20 Heritage analysts adjusted these life tables for future changes in life expectancy, using the mid-range projections of the 1997 Trustees Report.
Throughout this study, comparisons are made between what families could accumulate during their working lives if they were able to invest their Social Security Old-Age and Survivors taxes (less the life insurance premium equal to the value of pre-retirement OASI benefits) and what they can expect to receive, on average, in Old-Age and Survivors benefits. Different assumptions are entertained regarding the composition of the worker's portfolio of private investments. For years prior to 1997, the historical inflation-adjusted rates of return on long-term U.S. Treasury bonds 21 and U.S. equities 22 are used to determine, respectively, the rate of return on bonds and the rate of return on equities. For the period 1997 onward, Heritage analysts use forecasts of the real rates of return on 30-year long-term U.S. Treasury bonds to estimate returns on bond investments. These forecasts were made by WEFA, Inc., an economics consulting firm, and published in its Long-Term Macroeconomic Forecast for October 1997. 23 The eventual long-run average of these forecasts is a 2.8 percent real rate of return. The annualized real rate of return on equities is assumed to be 5.7 percent, which lies at the lower boundary of professional estimates of the long-run returns to equities. 24
The Heritage Foundation
Social Security Rate of Return Microsimulation Model
The Heritage Foundation Social Security Rate of Return Microsimulation Model computes the explicit annualized rate of return from Social Security on the basis of the taxes that individuals or couples are projected to pay and the benefits they can expect to receive during their lifetime. The focus of the model is not to provide estimates of the "average" rates of return to existing populations but rather to use data to construct representative individual and family types and to estimate the rates of return that those representative types can expect to receive.
Internal Rate of Return
The internal rate of return is defined as the rate that will set the expected discounted value of the stream of Social Security OASI tax payments (that is, taxes [Ti]) equal to the expected discounted stream of income from the system (that is, benefits [Bi]).
Discount Rate
r is the discount rate such that Social Security Contributions
The taxes paid by an individual are calculated by multiplying the individual's taxable earnings and self-employment income in a given year by the OASI tax rate in that year. Each individual is assumed to begin work on his 21st birthday and to cease working on the date on which he is entitled by law to collect the full Social Security Old-Age benefit. The OASI tax rate is taken from current law until the year 2015, after which tax rates are adjusted annually so that income and expenditures of the OASI program are equal. 25
The tax revenue in a given year is calculated by means of multiplying the earnings for that person by the OASI tax rate
Ti = xi*Wi - Li
in which x is the OASI tax rate (combined employee and employer share) for year i, Wi is the total taxable wage, salary, and self-employment income for year i; and Li is an amount equivalent to the value of a life insurance premium equal to the actuarial value of pre-retirement OASI coverage.
Earnings
The individual's annual earnings are assumed to be a fixed proportion of Social Security's average wage index 26 for employed and self-employed workers. Average-income Hispanic workers are defined as those earning $17,911 in wages and salaries. 27
For periods subsequent to 1996, the average wage index is assumed to grow at the rate assumed under the "intermediate" projections made by the Social Security Board of Trustees in its 1997 Annual Report. 28 In the case of the "Single-Earner Married Couple" scenario, it is assumed that one spouse pays no OASI taxes during his or her lifetime. In the case of the "Double-Earner Married" couple scenario, each earner is assumed to pay OASI taxes.
Post-Retirement Old-Age and Survivors Benefits
OASI benefits are calculated on the basis of the "bend point" formulae--the earnings levels from which benefit amounts are calculated--as specified under current law. For example, in order to calculate the monthly benefit amount for an individual who first becomes eligible for full Social Security Old-Age benefits in 1995, the individual's Average Indexed Monthly Earnings (AIME) is calculated according to the formulae contained in current law. Individuals receiving benefits for the first time in 1997 are paid 90 percent of their AIME up to the $437 bend point, 32 percent of any earnings between the $437 and $2,635 bend points, and 15 percent of any amount in excess of $2,635 (up to the maximum amount of earnings that are taxable). For years after 1997, these bend points are indexed at rates in the "intermediate" range projections made in the 1997 Trustees' Report.
Benefits are paid up to the point of the individual's life expectancy. These tables are adjusted to incorporate fully the effect of changes in life expectancy that are estimated by the Trustees of the Social Security Trust Funds to occur over the period 1993-2070.
Survivors Insurance
For married couples, the value of pre-retirement Survivors Insurance--paid to children of deceased covered workers and the spouse taking care of them--is approximated by subtracting from taxes (Ti) the premium required to buy an equivalent term life insurance policy. Covered individuals are assumed to carry two 10-year term life insurance policies over 20 years between the ages of 35 and 55. For each covered worker who turned 35 in 1997 and who has two children and earns an average wage, the Survivors Insurance policy is estimated to be equivalent to a 10-year term life insurance policy worth $295,000. For each average-wage covered worker with two children who turned 45 in 1997, the Survivors Insurance policy is assumed to be equivalent to a 10-year term life insurance policy worth $194,700. The market insurance annual premiums required to buy every $250,000 worth of insurance (in 1997) are estimated, respectively, to be $167 and $345 for a male and $150 and $230 for a female. 29 The estimates of the life insurance component are indexed to changes in the earner's Primary Insurance Amount, 30 which is used to calculate the worker's retirement benefit.
In the case of the single-earner married couple, each spouse is assumed to be the same age. After retirement, the couple is paid 150 percent of the benefit amount payable to a single beneficiary during the lifetime of the husband. During the period between the death of the husband and the death of the wife, the wife is paid 100 percent of the benefit amount payable to a single recipient. 31
Life Expectancy
Life expectancy by worker's age in 1992 is estimated based on data contained in the National Center for Health Statistics' 1992 Life Tables. 32 These estimates reflect only the demographic conditions that prevailed in 1992, however, but not the long-term secular upward trend in life expectancy that improved health care and better nutritional standards will cause.
The Board of Trustees of the Social Security Trust Fund, for example, estimates that life expectancy at birth will increase by 5.8 years for males and 4.6 years for females between 1997 and 2070, and that life expectancy at age 65 will increase by 3 years for females and 2.9 years for males. 33 In order to create life expectancy projections that embody these projected trends, it is necessary to adjust the 1992 Life Tables. Three adjustments were made to the 1992 Life Tables so they would conform with life expectancy estimates for Hispanics contained in the U.S. Census Bureau's population projections. 34
First, Heritage analysts made a slight adjustment in the 1992 Life Tables by applying to them an age-weighted index that adjusts for the estimated increase in life expectancy over 1992-1997:
Q = E + J, and
J = ((O/65)*S +((65-O)/65)*X)
in which
Q = 1997 "adjusted" static life expectancy;
J = age-weighted increase in life expectancy age over 1992-1997;
E = life expectancy based on 1992 "static life tables";
O = age in 1992 (ranges from 16 to 60); and
S and X = respectively, the increase in life expectancy at birth and age 65 over 1992-1997.
Second, Heritage analysts recognized that the gains in life expectancy in the post-1997 period will not be uniform across the age distribution. The Social Security Administration estimates that life expectancy at birth will increase much faster than life expectancy at age 65. In order to calculate the gain in life expectancy for individuals between these two points (birth and 65), an age-weighted index is used:
G = ((A/73)*B +((65-A)/73)*x')
in which
G = overall gain in life expectancy for a particular age group over 1992-2070;
A = age in 1997 (ranges in model from 21 to 65);
B = gain in life expectancy at birth between 1997 and 2070; and
x' = gain in life expectancy at age 65 between 1997 and 2070.
G can be used to construct a projected life table for the single year 2070, at which point L is life expectancy for each age group in 1997 and G is the gain in life expectancy expected to occur for that particular age between 1997 and 2070:
L = Q + G.
Third, this projection also must take into account the fact that life expectancy gains will be distributed over time as well as across the age distribution. The gains in life expectancy projected to occur will be spread across a period between now and 2070. The later a cohort is born, the greater the proportion this increased longevity will be from the point at which the cohorts can be assumed to benefit. In order to estimate the degree to which a given cohort will benefit from this increase in life expectancy, the following linear weighting equations were used:
"Dynamic" Life Expectancy = Y + R*(G)
in which
Y = Q, or life expectancy in 1997;
R = ((2070-V)/73); and
V = year in which the individual's life expectancy expires. |
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