Taxing Life Expectancy?

Paul Bou-Habib

​In my last post I considered the proposal that ageing societies should raise the retirement age. Raising the retirement age simultaneously increases the number of proportion of people in the economy who work, while decreasing the proportion of elderly persons who receive publically funded services. So it is a potentially very effective solution to increasing old age dependency ratio.
 
My main concern about raising the retirement age is that it seems to disproportionately burden people with shorter post-retirement life expectancy. If the retirement age is raised, they will enjoy fewer years of retirement than others, and this may not be fair, especially if they face a shorter period of retirement because they have more difficult lives. I considered the idea that we should avoid adopting a uniform retirement age and instead adjust retirement age according to the sector of the economy in which the worker works. However, I wasn’t entirely comfortable with that idea: I thought it might stigmatise people with shorter life expectancy by making their disadvantage so manifest.
 
It may be, however, that that is a risk worth taking: that is, that it is better to risk stigmatising a group of people than to deny them the enjoyment of a retirement that they are entitled to.
 
In this post, I want to discuss a relate policy proposal as a response to the old age dependency ratio. This policy focuses on increasing the contributions, during their working lives, of people who face longer life expectancy than others. The social science is pretty clear that there is a close link between income and life expectancy, so policy makers are likely to “capture” contributions of individuals with higher life expectancy by taxing income at higher rates. This idea has the appeal that it will raise money to pay for the increasing proportion of elderly people in our society, and furthermore, it seems fair. It is, after all, in large part due to increased life expectancy that the old age dependency ratio is increasing.
 
Now, it might be said that higher income people already contribute more towards public services for the elderly. The tax systems of most states are, after all, progressive tax systems. But the proposal I have in mind would involve a reform of those systems in the following respect: it would link the progressivity of the tax system to life expectancy. In other words, the policy proposal is that the progressivity of the tax system should increase automatically as the life expectancy of higher income people increases. 
 
Would higher income people have a legitimate complaint against this proposal? Consider the following possible complaint. Not all higher income people who are expected to live longer than average lives actually do live longer than average lives. Those who don’t will have paid more towards public services for the elderly without reaping the benefit of a longer life. That seems unfair to them.
 
That may well be true, but in the current system, in which people do not pay tax in proportion to life expectancy, there may well be even more unfairness. In that system many people with shorter lives will have paid as much towards public services for the elderly as people with longer lives. The instances of unfairness in the current system may be greater than in the reformed system.
 
It seems, then, that higher income individuals may not have a strong complaint at being taxed in proportion to their higher life expectancy. That doesn’t mean other objections can’t be raised against the idea. For example, it may be that adjusting the tax system affects the economic incentives of individuals in ways that are detrimental to the economy as a whole, a fact that may have an impact on lower income individuals as well as higher income individuals. That would be a reason to refrain from adopting the reform. Still, there may be other ways in which we can adjust our public policies to the different life expectancies of individuals – other than by adjusting tax contributions, that is. So the underlying idea may be worth pursuing through some other reform.

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