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WORKING PAPERSERIES : THE SOCIAL SECURITY COST OF SMOKIN6 John B. Shoven Jeffrey 0. Sundberg John P. Bunker Working Paper No. 2234 NATIONAL BUREAU OF ECONOMIC RESEARCH, INC.

Th* National Bureau oi Econoinic Resea" is a peivate, noe-profit, nan-pardsaA orgaaizaNon eusaald in 4aaedire aaalysis of the Aamiean etonocny. 11ds pap.r has not undergone the rm+ewacco~+ded otficfai NM publicadoas; in patdatiar, it has not been wbaritted for approval by ahe Board of Dkecto.am lt is Intended to malce raait: oi NeQt rexarcfi ava8abfe to other economists in pcdiaiinary fora to encourage dstmsioa and suggestions for rcviaion befoee final publication.

NBER WORKING PAPER SERIES THE SOCIAL SECURITY COST OF SMOKING John B. Shoven Jeffrey 0. Sundberg John P. Bunker Working Paper No. 2234 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 May 1987 Paper presented at the National Bureau of Economic Research Conference on the Economics of Aging, March 19-22, 1987, New Orleans, LA. This work originated when John Shoven and John Bunker were Fellows at the Center for Advanced'Study in the Behavioral Sciences in 1984-85. The research reported here is part of the NBER's research program in Taxation. Any opinions expressed are those of the authors and not those of the National Bureau of Economic Research: 0

. NBER Working Paper ai2234 May 1987 The Social Security Cost of Smoking ABSTRACT Our paper is an ezaaination of the Social Security cost of smoking from.an individual point of viev. It is well latown that smokers have a shorter life expectancy than nonsmokers. This means that by smoking they are giving up potential Social Secutity bensfits. We estimate this caat and consider the effects on the system as a whole. Qe use mortality ratios, which relate the annual death.probabilities of smokers and nonsmokers, and the percentage of smokers in each age group to break down the life tables for men and women born in 1920 into the approximate life tables for smokers and nonsmokers. ue then calculate expected Social Security taxea and benefits for each group, using median earnings as a base. We find that smoking costs men about $20,000 and women about $10,000 in expected net benefits. The implication of this for the system as a whole is that the prevalence of smoking has a direct effect on the financial viability of the system; every decrease in the number of smokers in sociery increases the system's liability. Changes in smoking behavior should be•recognized as affecting the system. John B. Shoven Department of Economics Stanford University Encina Hall, 4th Floor Stanford, CA 94305 (415) 723-3712 Jeffrey 0. Sundberg John P. Bunker Department of Economics Stanford University Stanford University School of Medicine Stanford, CA 94305 HELP Building Room #7 (415) 725-0959 Stanford, CA 94305 (415) 723-6426

1. INTRODIICTION Smoking•in the United States is associated with enormous costs to society. The Congressional Office of Technology Assessment has estimated the armua1 cost of medical cars for smoking related ilZaeas at $15 to $30 billion, and that smoking related illness is responsible for an additional $49 to $70 billion in lost productivity. There are also substantial costs to the iadividual who smokes in tezms of lost wages aver a life time., primarily affecting those who die of smoking related disease while still active wage earners in the work force. Costs to the individual also include approximately $500 to $1,000 per anm"" for pack and two pack-a-day smokers to purchase cigarettes. An additional cost to the individual is the loss of Social Security benefits as a result of smoking-induced loss of life expectancy. '!he-data presented herein estimate the masgtitude of this loss for single and married men and women born in 1920 and 1923, respectively. While most of the previous literature on the costs of smoking and the benefits of quitting has overlooked the implications of smoking behavior on pension plans (see, for ezample, Oster, Colditz, and Kelly (1984)), this is by no means universal. Cori et al. (1983) estimated that the savings realized by Ford Motor Company if the health of their employees improved (in terms of less expensive medical insurance, disability insurance, and life insurance) would be much smaller than the additional pension costs due to their increased longevity. Atlcinson and Townsend (1971) noted that the fiaancial benefits the British National Health Service would enjoy if there was a forty percent reduction in smoking in Britain would be more than offset by the increased cost of retirement pensions. In this paper, we eT'm{*+~ the Social Security consequences of smoking from the individual or household perspective. From that vantage point, Social Security can be thought of as a prepaid life annuity. Contributions or taxes N 0 N W ~ N 0 0 ~ 1

are collectad during one's work life which entitle aae to an iadezed life aanuity b.ginaiag at age 63. The a:muity can be cosasenced at age 62 vith a roughly fair actuarial adjustm.nt, and can be started at an ago beyond 63 with somewhat higher benefits reflecting the shorter expected raw{mng lifetime. In general, the system is not actuarially fair (favoring sove cohorts relative to oc.hers, those with low incomes or short covered c=reers relative to others, and aarrieds, especially oae.earaer couples, relative to singles). Oar point is that the system is imfair in a way v.ry relevant to the dscision of whether or not to smoka. Social Security does not have separate benefit strvctures for smokers and nonsmokers even though ssok.rs have a much lower chance of reachiag retirement age and a shorter expected length of retirement conditional on reaching that age. The Office of Teci~aology Assesssent (1985) estimatad that 273,000 p.opie died in the United States in 1982 of saoking related disease. Of those, 44 percent, or 121,000 died before they reached their 65th birthday. They may have never collected anything from Social Security. If they were sarriad, their spoase may collect vidov's benefits, but it is clear that their premature deaths greatly reduce their raturn on their participation in Social Security. Smoking also affects the liedicare portion of the Social Security system. While we concentrate oa OASI, it is probably worth noting that the health insurance component is siailarly affected. Many estimates of the effect of smoking an the total desand for health care services in the caantr9 find that it is small in the long run. Smokers certainly experience more health problems per year of life, but this is offset by the fact that they live fe.rer years. Qith a lower incidence of smoking, there would be more elderly additional health care services. The reduced dsmand caused by who require the improved health status of the former ssoicers is offset by extra care needed by the ~ 0 N W ~ C 0 ~ 2

additional elderly. Thers aight be some initial reduction in the deaaad for health care if smoking was reduced. The improveaents in health status would presumably occur before the ags structure was significantly zltared. However, in the long ztm the two effscts offset each other. Despits the fact that total health car. daoaad may be little affected by smoking, Iiedicare's finances are almost certainly affected. 'rhe reason is that it is a prepaid health insurance aumuity for those over 65. Medicare does not bear the higher health costs of nonelderly smokers, but benefits financially from the fewer numbers of elderly due to smoking. The other side of the coin is that smokers, as with their retirement benefits, pay while they work for old age health insurance which they are less likely to collect, or to collect for a shorter period than nonsmokers. Wright (1986) estisatss that each person who quits smoking increases the deficit faced by the HI component of Social Security for just these reasom . Our study is the QASI analog of Wright's HI research. We assemble separate life tables for smokers and nonsmokers and then estimate the Social Security tazes, benefits, and transfers for members of the 1920 birth cohort. 74 do this for those who earn median wages for their age and cohort and for those who earn 60 percent of the median, in each case begina3ag at age 20. The results can be previewed by saying that re find the expected loss in nst Social Security b.nefits accompanying smoking to be very large relative to the other costs of smoking. The loss exceeds the lifetime costs of cigarettes, is large relative to the estimates of the medical costs and lost wages diu to excess morbidity and mortality, and is perhaps tsn times greater than the corresponding Medicare figures of Wright. The next section of the paper briefly reviews what is kaowa about tfie effect of smoking on mortalir.y. It discusses disease specific effects and also our technique of using mortality ratios to yield approximate separate life 3

tables for smokers and nonsmokers. The third section of the paper describes our simulatioa procadure for calculsting the Social Security costs of smoking. Zt presents separate results for siagle iadividusls, one-earaer and ttiro-earaer couples because of their separate t=.atmsat by Social Security. Qs conclude the paper with an interpretation of rhat our fiad3ags imply about the private and social incentives to quit ssokin;. 2. EFFECT OF SISOS=G ON !SG'gT1T_rrv There can be no statistical doubt that smoking is associated with increas.d mortality hazard rates. The overall fiadina of the 1979 Surgeou G•aeral's report an the snbject was that the mortality of alI sale cigarette smokers is about 170 percent of that of male nonsmokers. For two-pack-a-day saok.rs, the average mortality ratio is 200 percent. For particular diseases the relative haxard is eve n areater. For azaaple, two separate studies find smokers are between 9 and 15 tim.s more Likely than nansmokers to die of lung cancer (Lubin et a1. (1984) and Covell and Hirst (1980)). The risk of dying of arterosclerotic and degenerative heart disease and ayocardial iasufficiearies has been estimated at 2.7 tiaes as great for smokers as nonsmokers (Covell and Hirst (1980)). There is further evidence that there is a significant interacicioa between smoking and other eaviroam.ntal factors such as exposure to asbestos. The finding is that rhile smoking is a major cause of lung caacer, smoking coabiaed with other assaults (snch as iadcstrial exposure) greatly iacr:ases the mortality hazards (Schneiders.a and L.via (1974). Our development of separate life tables for ssokers•aod nonsmokers uoLlizes the fiadiags.of E. C. Hasstond (1966) regarding the effect of smoking on N 0 N W ~ mortality. Qoriciag for ttu American Cancer Sociecy, he conducted a comprenensiveCA four-year study trackiag a population of over one million subjects. He determines the death rates and the prevalence of certain causes of death for 4

smokers and nonsmokers of many different characteristics. The tachnique vas to ezamine death certificates for the cause of death and to request information from the attanding doctor whenever cancer was mentioned on the death certificate. Hamsond's results are a very detal.led set of mortality ratiosl for diffarent types of smokers and for several different causes of death. In 1959 and 1960, Hamoond enrolled aver one million volunteers from t9renty-five different states to provide data on mortality. Subjects were classified by sex, age, type of tobacco smoked (cigarette, cigar, pipe, or none), age at which subject began smoicing, daily amount of smoking, and degree of smoke inhalation. Each subject was contacted an=tally for four years to track the number and tiaing of fatalities in each group. Death certificatas vere received for aver 97% of reported deaths to provide better information as to causes of death. Using the accumulatad data, Hammond combined subjects with similar characteristics into five-year and tsn-year age cohorts, and divided the number of deaths in each cohort during the study period by the nsaber of "person- years• experienced in each cohort. This provided cohort death rates over the period for groups of similar age and sex, and varying smoking habits. This allowed Hammond to calculate'mortality ratios for different groups. A sample of his findings is shown in Table 1. The separate mortality tables that ws have produced are contained in the Appendix to this paper. The basic life tables used are the cohort life tables for men and vomen born in 1920, as estimated by the Social Security Administration. The mortality hazards are shown in column 8 of the appendix ~ table for men and .roasn. If we let Q'.(a) represent the one-year death 0 probability for males as a fnnction of age (similarly QA(a) for females), ~ ~ N CA ~-

Tabl. I Current Number Per Day 1-9 10-19 20-39 40+. 1-9 10-19 20-39 40+ Mortality Sstios for Smokers as Dat.raia.d by B. C. Sasmoad Ags 35-44 43-54 55-64 65-74 75-84 M+sa rith History of Only Cigarstta Smoking * 1.84 1.33 1.50 1.36 1.36 2.26 1.92 1.65 1.55 1.91 2.41 2.05 1.71 1.26 2.59 2.76 2.26 1.81 * Vos.n rith History of Only Cigarette Smoking 0.90 0.95 0.99 1.09 1.07 0.97 1.22 1.31 1.18 1.21 1.35 1.54 1.46 1.51 * * 1.96 * * * * Sigaifias a vary low rn:mbsr of sxp.ctad daat3ss (small sampla or low death rats). SOQBCE: Hammoad, p.133. 6

let e(a) represent the fraction of inen who smoke as a ftsaction of age, and 2?(a) represant the mortality ratio of male smoker to nonsmoker as a function of age, then Q~(a) 1 • fa(a)(1 • t?(a)) and Q$(a) - e(a) x (4s(a) where C?M(a) is the anmzal death probability of male nonsmokers as a function of age and QS(a) is the aaausl death probability for male smokers. The formulas for vomen are identical with all the superscripts changed to v's. The appendix tables displaye tha assumptions for 1?(a) and I?(a) , derived from 8ammond (1966), and for fa(a) and e(a) for the 1920 cohort, derived from Harris (1983). They also show the results for QNS(a), QS(a), Q~S(a), and QS(a). Table 2 offers some summary statistics based on these derived life tables. Our life tables for the 1920 birth cohort show that 85,798 males and 88,787 females out of 100,000 births live to age 20. It is well kaown that smoking affects the mortality of vomen less than men. That is partially due to the fact that women smokers smoke less, iabale less, and are more likely to smoke filter cigarettes. Again, out of 100,000 births, 53,051 male smokers (who began smoking at age 20) survive until age 65, whereas 67,464 male nonsmokers survive until that traditional retirement age. Conditional on living to age 20, almost 79 percent of nonsmokers make it to 65, whereas slightly less than 7

2sbls 2 Lifs Emp.ctaacF, li.dim Age at D.ath, And Svrviviag Populitioa at Ages 20 and 63 For 1920 Eirr.h Cohort Susvivors at age 20 out of Susvivors at ag. 65 out of Lif. expectancy Life sxpsctaacy Isidisa age of d.ath '.S.dian age of dsath 100,000 100,000 conditioaal coaditioaai conditional conditional births births on age 20 on age 65 oa age 20 oa ags 65 Smoksrs 85,758 53,051 68.7 78.8 70 77 Noasmokars 85,758 67,465 75.1 81.5 77 81 Wos.a Ssoicars 88,787 ' 69,303 77.2 84.6 79 84 Noasaokars 88,787 74,461 80.5 86.6 84 86 a

62 percent of smokers do so. At age 20, nale smokers have a life expectancy . 6.4 years shorter than male nonsmokers, and a median age of death 7 years youmger. Conditional on surviving to 65, male smokers have a remaining life expectancy which is 2.7 years less than their nonsmoking cohort members. The figures for women show that the life expectancy difference at age 20 is 3.3 years, while the difference at age 65 is 2 years. Our life tablei cs++not sort out causality and correlation. It is certaialy true that smokers would not become identical to nonsmokers if they stopped smoking. Smokers drink more alcohol tban nonsmokers, have a higher incidence of suicide, and, in general, may face higher mortality risks than nonsmokers for reasons correlated with smoking but not caused by smoking per se. Qe have not been able to separate these effects, although it is our belief that most of the higher mortality risks faced by smokers are due directly to the cigarette-consvmption. However, it should be kept in mind when interpreting our results that we have attributed all of the mortality difference to the cigarette consumption. 3. SIMLTIATION OF 'ffiE SOCIAL SECUBITI COSTS OF SMORI3G. ae aY9mi*+~ the Social Security consequences of smoking for 100,000 man born in 1920 and 100,000 women born in 1923. 'Ihe three year difference approximates the average age gap in marriage for this cohort. The 1920 cohort life tables compiled by Social Security are taken to be applicable to the men and women in our study. Re calculate the Social Security outcomes separately for single men, single women, and one and t•.ro earner couples. We assume that each person's probability of death is given by the life tables, and therefore is independent of the status of their spouse. The rnzmbet of women who become widowed in each year until the husbands retire is noted, and each "widow cohort• is then tracked as a separate population. This is necessary, because 9

at retireaent widows msist choose between a benefit basad on thair o+rn work record and one based on that of their spouse. In the case of the one earnar couples, we assume that the husband is employed until retirement or death. If the husband should die before retirement, the widow is asstmod to Voric cmtil rstirsaent or death. We have not been very sophisticated in davaloping our earnings profiles. The earnings series used are median aarnings for men and woaen vorldng full- time year-round, tskan from the Cansus Bureau Current Population Seport P-60, No. 142 (1982). Earnings before 1955 and 1982 are estimated using a related series from the Depart:mant of Isbor's Employment, Hours, and Earnings report. The earnings series are then adjusted to reflect a life-cycle pattern of lifetime earnings, %ising Census data on mean incomes for different age groups from Report P-60, No. 137. Our analysis for low waga earners exam{res those who earn 60 percent of the median earnings profiles. There are several factors vh3c3s could be added to our earnings series. First. we do not take into account the effect of the iacraased morbidity of smokers on their earnings pattern. This is probably a relatively minor adjnstment, but one which is conceptually desirable. Second, nonworking wives entering the workforce when widowed are assumed to immedistaly earn the median (or 60 percent of the median) amount for their age. This is cert.zinly optimistic regarding their prospects. Finally, we do not take into account spells of uaamployment, employment in the uncovered sector, or disability. The surviving members of the cohort are assumed to retire at aga 65 and begin to recaive benefits based on the 1985 Social Sacurity law. Q* assume that the initial benefit received is fully indexed for inflation for their remaining life. The women in the simtsiations retire chree. years later, simply =e="lect:ng that they are three years younger than the men. Because the median earnings of man exceed those for women, the Social Security OASI benefit based on a man's 10

earnings history exceeds the benefit based on a voman's work record. ds a result, husbands and widowers will always elect to take their own benefit. Wives choose between their own benefit and oae-half of their husband's, while widows may elect to receive their oxn benefit or the benefit which their husband would receive were he alive and had not worked since the year he actually died. In other vords, a voaan vhoae husband died in 1965 could taks the benefit he would be receiving had he stopped working in 1965 and lived to receive his benefit, or she could take her own benefit. In the tsro-earmer cohort, her benefit is based on her earnings from 1940 to her retirement in 1988, while in the one-earner cohort her benefit is based on a shorter work history, 1965 - 1988, since we assuae she only begins work upon her husband's death. This means that a vidow's benefit may depend on when h.r husband died (and in the one-e.raer case must depend on it), necessitating our keeping track of the 'widov cohorts' mentioned above. Qives over the age of 65 whose husbands are still alive will alsrays receive one-half of their husband's benefit in the oae-earner family, since they have no earnings history of their o.rn. In the txo-eaxaer case, wives-will take their own benefit since their benefit exceeds half their husband's, given our earnings series. All benefits are calculated in real dollars, so coaparfuon of 1985 and 1988 benefits is valid. The results for singles are shown in Table 3. All figures are stated in 1985 dollars, and the real discount rats used for cash flovs occurring at other times is 3 percent. Rith those assumptions, the figures in the upper portion of the table for single men with median wage profiles in this cohort show that nonsmokers can expect to receive a net transfer from Social Security of $3,436, while the expected benefits received by smokers fall $17,782 short of the expected contributions. All of these figures are conditioaa]l on having survived to age 20. The Social Security cost of smoking for single men with median C iI

Tabls 3 Present valus of Social S.cnrit7 Benefits and ?mus (in 1985 $) And Intsrasl Rats of Rsturn to the Social S.curity Program For 2ismb.rs of the 1920 birtb Cohort Raal Nst Intarnal. Ezpsctsd F.zp.ctsd Present Rsts of Present Prss.nt 14.t valu. Real Ratsira value vatus b*.ctad Conditional Intarasl Conditional of QASI of OeSI Present On Surviving Rats of On Surviving a.n.fits Sass Value Until Ag. 65 Hstvrn Until Ags 65 Median Earnings Profile NAM Smokers 53,497 71,279 •17,782 3,721 1.87 3.18 Nonsmokars 79,436 76,000 3,436 18,218 3.17 3.78 vom.n Smk.rs 65,512 57,386 8,126 21,843 3.45 4.03 Nonsmokers 75,788 58,395 17,394 28,283 3.87 4.27 Low (60% Median) Earnings Profile d.a Smokers 41,378 50,342 •8,964 8,918 2.25 3.57 Nonsmokers 61,441 53,433 8,008 20,130 3.53 4.15 Aom.n ~ Smokers 47,159 34,431 12,728 23,166 4.06 4.65 Q ~ Nonsmokers 54,556 35,036 19,520 27,801 4.47 4.88 CD M'r 12

earnings patterns thus exceeds $21,000. The internal rats of return, which equates the expected value of payouts and payins, is 1.87 percent real for smokers and 3.17 percent for nonsmokers. If one only looked at those who survived until 65, the rates of return would naturally be higher. In that case, the real internal rats of return for median wag. aale smoicars in this cohort is 3.18 percent, rrhereas the rate for nonsmokers is 3.78 percent. The dollar difference in the net transfer between nale smokers and nonsmokers, conditional on surviving to 65, is still about $14,500. Table 3 indicates that the Social Security cost of smoking is smaller for single women than for single men. In general single women get a higher rate of return from Social Security for two reasons. First, they have longer life expectancies, and, second, they have lower earnings and'the system is progressive. Conditional on age 20, the diffsrence in the net transfer to median wage women nonsmokers and smokers is slightly more than $9,000. The real intaraal rate of return for smoking voman is 3.45 percent, while the figure is 3.87 percent for nonsmokers. Conditiona7l on reaching age 65, the dollar difference between smoking and not is about $6500 for median wage single women. The lower portion of Table 3 shows ttie results for single individuals with earnings 60 percent of the median for their age and cohort. The loss due to smoking in the expected transfer from Social Security is almost $17,000 for men and $7,000 for women at this earnings level. Re conclude that the Social Security cost of smoking is not terribly sensitive to earnings levels. The corresponding results for one and two earner married couples with median earnings profiles ars shown in Table 4. One earner couples receive larger transfers and a higher rate of return from Social Securitq because of the benefits received by the nonworking spouse. The Social Security expected cost of smoking is similar for couples in either circnmstance. The net 13

Table 4 Present Value of Social Security Bsn.fits and 2sxas (in 1985 $) .Aad Internal 8sta of Rst~ua to the Social S.eurity Progrm For li.abars of the 1920 Birth Cohort 2S.disa Esraiags Profile Real 14st Internal FsF.ctad Ezp.etad Pres.at Bste of Present Prueat Nst Valu. Real Return vslue Value Fsp.atad Coaditionsl Zataraa.l Conditional of OASI of OASI Present On Surviving Rita of On Surviving Benefits T.xss valus Until Ag. 63 Return Until Age 63 Narriad (one saraar) Both Smoks 118,223 79,466 38,757 81,270 4.40 5.41 Nonsmokers 149,229 81,004 68,225 95,872 5.14 5.63 Mala smoker 128,748 79,722 49,026 92,123 4.67 5.67 female nonsmoker F.mal• smoker 139,353 male nonsmoker 80,860 58,493 87,010 4.93 . 5:43 Married (two .uaars) Both Smoics 126,687 128,664 -1,977 38,639 2.95 3.87 Nonsmokers 162,985 134,395 28,590 56,371 3.68 4.18 Male smoker 138,313 129,673 ' 8,640 48,103 3.22 4.04 femala nonsmoker Female smoker 151,494 male nonsmoker 133,386 18,108 48,402 3.46 4.05 v02E: Figures ire per honsanold. 14

expected present value of participation in Social Security is $29,467 lower for one earaer couples who both smoke relative to one earner couples where neither spouse smokes. If only the man smokes, the loss in the expected transfer from the system is $19,199, vhereas if only the wife smokes the loss is $9,732 relative to a one earner couple in which neither smokes. To put these figures in perspective, one might note that the median earnings of 64 year old men in this cohort were $20,315. Thus, the Social Security loss for both smoking amounts to almost 1.5 years labor income. In fact, the loss in slightly greater than that given that Social Security benefits are taxed more favorably than labor income. The nssobers for two earner couples are that their expected nst Social Security transfer is $30,567 less if both spouses smoke than if neither does. The real internal rate of return for two earner couples in which both smoke is 2.95 percent, whereas it is 3.68 percent if neither smokes. The cost of the husband only smoking is $19,950, and the cost of the wife only smoking is $10,482. For reference, the median aaaual earnings of women is about $12,500, so the loss if they both smoke is roughly equivalent to 2.4 years of the wife's earnings. Table 5 contains the results for low wage one and tvo-earaer couples. For c one earner couples, we find that the cost of both smoking is roughly $22,500. For two earner couples, the cost of both smoking is $23,500. Once again, the cost is roughly twice as large for msn as it is for women. The dollar costs to smoking are greater relative to earnings for low wage households than for median earners. The gain in Social Security benefits that accrue to the nonsmoker, or to the smoker .Tho quits, represents an equal :uid opposite drain on Social Security fnnds. This drain is only partially offset by the. increase in preretirement N 0 N W W N ~ 0 ~ ~ ?5

If Table 5 Prsssnt valise of Social Security Baufits and Taxes (in 1985 $) And Intasaal Bzts of Utura to the Social Sacurity Prograa For M.mbsrs of the 1920 Birth Cohort . Lov (60% dsdian) Earaings Profil. Real 8.t Intsrnal Fsp.ctad Fzp.ctad Present Rsta of Prasant Present Net vslne Beal Raurn vs].ue vslua ExFectad Conditional Internal Conditional of OASI of OASI Present On Survivia; Rsta of On Sur7iving Banafits Tas.s vilu. Until Age 65 Raturn Until Ags 65 Marriad (one sasaar) Both Smoka 91,761 53,146 36,614 70,896 4.78 5.81 Honssokars 115,531 56,327 59,204 81,313 5.50 5.99 Msle ssolcsr 99,952 55,300 44,652 79,101 5.05 6.07 faaala nonsmoksr Fsale ssoic.r 107,878 56,241 51,637 74,672 5.29 5.79 nals aonsmokar larried (tvo eaznars) B.ah Smoke 96,843 84,772 12,071 45,609 3.47 4.43 Nonsmokers 124,085 88,469 35,616 58,131 4.13 4.70 Msla smoker 105,689 85,378 20,311 52,959 3.74 4.61 female noasmoltsr Female saoicar 115,429 87,864 27,566 52,003 3.97 4.56 msla nonsmoker *iOTE: Figures are per household. N 0 / :6

taxes paid by nonsmokers and'ex-smokers in comparison with smokers, a substantially greater number of whom die prematurely. The potential cost to society, including the goversamant, of a successful anti-smoking program has not gons unnoticed. In 1971, the British goverament, in response to a recommendation by the Aoya1 College of Physicians to mount an anti-smoking campaign, estimated that such a campaign vould save money in the short rnn. However, by the year 2000, they forecasted that a 40 percent rednction in cigarette smoking would result in a net loss to the goverament of 29 million pounds due to additional benefits received by surviving ex-smokers. The Congressional Office of Tecltnol'ogy Assessment, in its recent report "Smoking- Belated Death and Financial Costs,- indicated that, in the event of a reduction of smoking, 'thers will be some increase in revenues to the government and the Social Security and Medicare trust funds becavse people will be working more years. The increase in these revenues, however, may not equal the additional costs borne by these programs for the additional retirees." Limiting her attention to Medicare's hospital insurance fund, Wright (1986) has estimated that the individual forty-five year old male who quits smoking will cost the fund between $204 and $2,745. We have emphasized the extent to which smoking reduces the expected value of Social Security payments below that of nonsmokers. Ye need to remember that because of the nature of the system, a drop in the number of smokers will provide a cost; every person who begins to smoke implicitly decreases the future liability of the system. The prevalence of smoking is an important factor in determining the financial viability of the system. The percentage of U.S. adults who smoke has fallen drastically in the last 20 years. In 1965, 521 of men and 35% of women age 20 and older smoked; by 1983 the numbers fell to 35% and 30% respectively (Health United States, 1984). i7

This should result in m increase in the average lifespan; since the najority of these people ars below retirement age, w sbould expect retiress in the futisre to live longer on average than current retirees, xho are already living longer than previous retirees due to the reduced use of cigarettes. A higher percentage of all workers will live to retiras.nt; those who do will collect benefits for a longer period. This should be reflected in the demographic projectioas upon vhic3s Social Security taxes and benefits are based. The trend toward fe.rer saokers has bean a long one, especially asong man. Unless that trend vas adequately projected, vs axpect Social Security demographic projections to be too low. SJhile the 1958 and 1966 Ac *'ri'l Studies by the Social Security A-4-{ri~tration do a good job of predicting 1980 total population levels, they predict too high a number of youag people and too low a number of retired persons. This implies offsetting errors, perhaps forecasting.a longar.'baby booa• than actually occurred and underestimating the additions to life expectancy, sode of which can be attributed to lower smoking levels. This burts the system twice; moze retirees are currently draving benefits than pro j ected, and fnnr rroricers riil be paying 'tazes in the future than projected. Our simalaCions suggest that each median vsge male smoker in the 1920 i,irth cohort roughly •saves' the Social Sesurity system $20,000 and each median rage female smoker saves $10,000. To get an approximate ides of the aggregate effect of smoking by members of this cohort on Social Security, va can multiply these saving figures by the nsmbar of smokers born in 1920. The result indicates that if no one had smoked in this cohort, the net transfer to this ~ population from Social Security vould have been $14.5 billion greater. As this N reflects only the cssange for those born in one year, one can easily sae that CD the total impact of smoking on the finsncial circumstances of Social Security Ph aaounts to hundreds of billions of dollars. ~ N to 18

While we by no means claim that the reduction in smoking is responsible for all the gains in life expectancy achieved in recent years, we have demonstrated the enormous potential impact on the system of reductions in smoking rates. Changes in the prevalence of smoking should be included in the systes's attempts to model future populations. 4. GONCLIISIOB The body of literature discussing the economic costs of smoking bss largely ignored private and social costs with regard to Social Security. Our analysis is a first step in estimating these costs, both in terms of net benefits to smokers and reduced payments by the system. STe find that the expected loss caused by smoking from participation in Social Security is a large one from the individual's perspective. The loss for a median wage male smoker is about $20,000, or about 11 months of earnings. The loss for median wage women is approximately $10,000 or about 10 months of earnings. These losses are quite significant even compared to the health cost consequences of smoking. We also found that these losses are not very different for workers with lover wages. The aggregate implications of our results are that smokers 'save' the Social Security system hundreds of billions of dollars. Certainly this does not mean that decreased smoking would not be socially beneficial. In fact, it is probably one of the most cost effective ways of increasing average longevity. It does indicate, ho.rever, that if people alter their behavior in a manner which extends life expectancy, then this must be recognized by our national retirement program. Looked at in.this way, it is not surprising that the large potential for increasing lifespans that reduced smoking offers, has sizable consequences for Social Security. :9 N O N W ~ ~ ~ ~ N O