Center for Business and Public Policy
at the University of Illinois, Urbana-Champaign

A couple of weeks ago I wrote about how Americans may spend more on health care because we are sicker than those in other countries.  A recent paper provides additional evidence on this point.  (Thanks to the Economic Logic blog, which pointed out the paper.)   The paper, by RAND Corporation researchers Pierre-Carl Michaud, Dana Goldman, Darius Lakdawalla, Adam Gailey and Yuhui Zheng, is entitled “International Differences in Longevity and Health and their Economic Consequences”, and it begins by noting that in 1975, life expectancy at age 50 was about the same in the U.S. and Europe.  Since then, however, Europeans have gained more than Americans.  In 2004, a typical 50 year old Eurpoean expected to live another 32.5 years, while his American counterpart expected to live only 31 more years.  Next, they note that Americans appear worse on several health indicators than Europeans.  For example, the U.S. looks worse than the group of Eurpean countries they study (Demnark, France, Germany, Greece, Italy, The Netherlands, Spain, Sweden) in terms of obesity, whether the person has ever smoked, heart disease, diabetes, stroke, lung disease, cancer, hypertension and disability.  This leads to the main question of the paper: how much of the difference in life expectancy from age 50 is driven by these differences in health?  If observed differences in health do not account for the difference in longevity, then it is possible that “‘being American’ an independent mortality risk factor, in the same way that being poor or being black increase risk above and beyond observed health.”  This ‘being American’ effect could be due to shortcomings of our health care system relative to that of other countries.

The main finding of the paper is that, if Americans had the same baseline health status as the Europeans in the study, they would live about 1.2 years longer.  So, differences in health status account for about 80% of the 1.5 year difference.

Of course, differences in health status at age 50 could, themselves, be a product of the health care system.  So, it is not immediately clear from the Michaud et al. paper that Americans are genetically sicker or that we make behavioral choices (e.g., eat too much) that make us sicker.  It could be that we get worse health care throughout our lives, and this leaves us sicker at age 50.  I suspect that this is not the case, but it is certainly a possibility.

This reminded me of a paper I saw a few years ago by Daniel Polsky and others entitled “The Health Effects of Medicare for the Near-Elderly Uninsured.”  The study found that if a person was basically in good health when they went on Medicare at age 65, Medicare helped to keep them that way.  But, for those who were already in declining health, Medicare was not that effective.  Now, if as the previous study showed, Americans have higher prevalence of chronic disease at age 50 than other countries, it may be that we, for whatever reason, enter the period of “declining health” earlier than Europeans do.  If insurance (as proxied by Medicare) is more effective in maintaining good health than restoring one to good health once deterioration has begun, then this suggests that the place to focus our efforts if we want to close the longevity gap with Europe would be in increased prevention and disease management efforts in middle age.

Next week: does preventative care save money?

I don’t know about you, but I have no idea how long I will live.  In most ways, this is a blessing - given how much I like to quantify things, I don’t think I could help myself from starting the grand count-down if I knew my death date for certain.  But in at least one respect - financial planning for retirement - this uncertainty is a real nuisance. 

Fortunately, there are financial products - known by the unsexy name of “life annuities” - that help solve this problem by converting  wealth into a stream of income that will last as long as you do.   There is plenty of research out there showing why annuitization can improve individual well-being by providing a higher level of consumption in retirement.  The problem is that most 401(k) plan sponsors don’t offer them in their plans, and thus most retirees or soon-to-be-retirees don’t have the option to convert their wealth into a guaranteed income stream.

Last Friday, I presented a new policy proposal at a conference sponsored by the American Council of Life Insurers, the AARP, the American Benefits Council, and WISER (apologies if I missed any sponsors!)  The gist of the proposal is to encourage 401(k) and 403(b) plan sponsors to adopt life annuities as the default distribution option from their plans.  The policy steps suggested to encourage it include fiduciary relief and the easing of some administrative burdens associated with qualified joint and survivor annuity rules.  If I may say so myself, the proposal was very well received - including by officials at Treasury, Labor and most of the Congressional staffers present.

Using “automatic enrollment” has proven very successful at increasing 401(k) participation rates, and I believe that “automatic annuitization” could help do the same for increasing annuitization in the payout phase.  This seems a worthwhile goal.  After all, saving assets is not enough to ensure retirement security - you also need a way to ensure that you have enough to live on no matter how long you live. 

I know that this will not make the most scintillating reading for the masses, but you might want to check out the paper anyway.  Whether or not this proposal is ever enacted, I am pretty confident that the future of private sector retirement plans in this country is going to include a greater role for annuitization.  So you may as well start learning about it now … here is the link to the paper.