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How to deal with age inflation

By Andrew Leigh - posted Monday, 12 October 2009


On his 64th birthday, Paul McCartney suggested that he might change the lyrics of one of his most famous songs to “When I’m 84”. While most took this as a sign that old age is in the eye of the beholder, it also reflects the fact that 64 isn’t 64 anymore.

The Australian life tables tell is that a 64-year-old in the Beatles era could expect to live for another 15 years. Today, a 64-year-old can expect to live for 21 more years - an improvement of six years. According to work by Harvard’s David Cutler and co-authors (PDF 279KB), the improvement in health has been even greater. They find that the self-reported health of men aged in their early-70s today is similar to the levels recorded for men aged in their early-60s three decades ago.

So in terms of life expectancy, 70 is the new 64. And in terms of health, 74 is the new 64.

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With a steady decline in the share of backbreaking jobs, and ongoing improvements in medical technology, it is reasonable to expect these numbers to keep rising. Yet to look at many of the statutes on our books, you would think that none of these changes had ever occurred.

The one area in which government appears to have correctly accounted for rising longevity is the eligibility age for the pension, which is now scheduled to rise to 67 in 2017. Yet the federal government has poured cold water on suggestions that the superannuation preservation age should also rise: a decision that is both inefficient (given longevity increases) and inequitable (since it advantages richer superannuants over poorer pensioners).

When each proposal to raise age limits is taken in isolation, it is no surprise that policymaking will be ad hoc. A better approach would be to index upper age limits in all laws, ensuring that they rise together as lifespans increase.

We already have a precedent for this kind of across-the-board indexation: the use of “penalty units”. Rather than write specific dollar figures into legislation, Australian parliaments typically set maximum fines as a certain number of penalty units. The intuition for this is straightforward: a fine of $1,000 in 2009 is considerably less harsh than a fine of $1,000 in 1999. Updating penalty units to keep pace with inflation is a straightforward way of ensuring that fines remain constant in real terms over time. It also helps ensure that the relative magnitude of different fines (e.g. tax fraud and welfare fraud) remains unchanged.

How might age indexation operate in practice? One approach would be to mandate that all elderly age limits should increase by three months every year (approximately the rate at which life expectancy is presently rising).

More radically, we could define ages in terms of time from death rather than time from birth. For example, we might legislate so that the typical person is eligible for the pension for the last 20 years of their life (which on current life tables would be age 65½). While this approach is a tad morbid, it does have the advantage of focusing directly on the policy parameter of interest, namely the expected number of years that a law will affect the typical individual.

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Age indexation should apply not only to laws that provide special benefits (age pensions, Veterans’ pensions, superannuation), but also to legislation that imposes additional requirements on the elderly. For example, drivers in many states are presently required to undergo annual tests after a certain age. As longevity improves, this age should steadily be shifted upwards. Similarly, laws that allow exemptions for the elderly (such as jury duty or voting) should have their age limits indexed so that they steadily rise over time.

Naturally, such indexation would only apply to upper age limits, since rising lifespans do not strengthen the case for lowering the age at which young people can leave school, drink or vote. If anything, longer lifespans suggest that such ages should be raised rather than lowered (today’s 18-year-olds will vote in three more federal elections than when the voting age was first lowered to 18 in 1973).

With limited political resources, parliament should aim wherever possible to find across-the-board solutions that are fair over time and across groups. Indexing fines and allowances has allowed politicians to spend less time debating dollar figures, and more time discussing the big issues of the future. Likewise, a move to age indexation could avoid the unseemly battle that arises each time a particular age change is suggested. Rather than age limits being determined by lobbyist power, wouldn’t age indexation be a fairer approach?

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First published in the Australian Financial Review on October 6, 2009.



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About the Author

Andrew Leigh is the member for Fraser (ACT). Prior to his election in 2010, he was a professor in the Research School of Economics at the Australian National University, and has previously worked as associate to Justice Michael Kirby of the High Court of Australia, a lawyer for Clifford Chance (London), and a researcher for the Progressive Policy Institute (Washington DC). He holds a PhD from Harvard University and has published three books and over 50 journal articles. His books include Disconnected (2010), Battlers and Billionaires (2013) and The Economics of Just About Everything (2014).

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