Tobacco Documents Online

TIMN 358269

z 14 WORKING PAPERSERIES = THE SOCIAL SECURITY COST OF SMOKING John B. Shoven Jeffrey 0. Sundberg John-P. Bunker Working Paper No..2234 J NATIONAL BUREAU OF ECONOMIC RESEARCH, INC. TIMN 358270

v The National Bureau of Economic Research is a private, non-profit, non-partisan organization engaged in quantitative analysis of the American economy. This paper has not undergone the re+riew accorded official NeER publications; in particular, it has not been submitted for approval by the Board of Directors. it is intended to make results of NBER research available to other economists in preliminary form to encourage discussion and suggestions for revision before final publication. ~ 1~-~ TIMN 358271 t

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. TIMN 358272 ~

NBER Working Paper #2234 May 1987 The Social Security Cost of Smoking ABSTRACT Our paper is an examination of the Social Security cost of smoking from-an individual point of view. It is well known that smokers have a shorter life expectancy than nonsmokers. This meaas that by smoking they are giving up potential Social Security benefits. We estimate this cost and consider the effects on the system as a whole. We use mortality ratios, which relate the annuall 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. We then calculate expected Social Security taxes 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 society increases the system's liability. Changes in smoking behavior should be recognized as affecting the system. John B: Shoven Jeffrey 0. Sundberg John P. Bunker Department of Economics Department of Economics Stanford University Stanford University Stanford University School of Medicine Encina Hall, 4th Floor Stanford, CA 94305 HRP Building Room #7 Stanford, CA 94305 (415) 723-3712 (415) 725-0959 Stanford, CA 94305 (415) 723-6426 TIMN 358273

1. INTRODIICTION Smoking in the United States is associated with enormous costs to society. The Congressional Office of Technology Assessment has estimated the annual cost of medical care for smoking related illness at $15 to $30 billion, and that smoking relatad illness is responsible for an additional $49 to $70 billion in lost productivity. There are also substantial costs to tha individual who smokes in tarms of lost wages over a life time., primarily affecting those who - - die of smoking related disT -- --- -f ease while still active wage earners in the work force. Costs to tha individual also include approximately $500 to $1,000 per annum 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. The data presented herein estimate the magnituda of this loss for single and married man and women born in 1920 and 1923, respectively. . Whila most of the previous literature on the costsof smoking and the benefits of quitting has overlooked the implications of smoking behavior on pension plans (see, for example, Oster, Colditz, and Kally (1984)), this is by no means universal. Gori at 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. Atkinson and Townsend (1971) noted that the financial 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 examine 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 TIMN 358274

are collected during one's work life which entitle on. to an indexed life annuity beginning at age 65. The anauity can be commeaced at age 62 with a roughly fair actuarial adjustment, and can be started at an age beyond 65 with somewhat higher benefits reflecting the shorter expected remaining lifetime. In general, the system is not actuarially fair (favoring some cohorts relative to others, those with low incomes or short covered careers relative to others, and aarrieds, especially ons.eaxn.r couples, relative to singles). • , . . _.._ ..._,~ . . . ... _ , _ . . . .. .. Our point is that the system is unfair in a way very relevant to the decision of whether or not to smoke. Social Security does not have separate b.ae it structures for smakers aad nonsmokers even though sackers have a much ry lower chance of reaahing retirement age and a shorter expected length of retirement conditional on reaching that age. The Office of Technology Assessment (1985) estimated that 273,000 people died in the United States in 1982 of smoking 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 married, their spouse may collect widov's benefits, but it is clear that their premature deaths greatly reduce their return on their participation in Social Security. Smoking also affects the Medicare portion of the Social Security system. While we concentrate on OASI, it is probably worth noting that the health insurance component is similarly affected. Many estimates of the effect of smoking on the total demand for health care services in the country 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 fewer years. With a lower incidence of smoking, there would be more elderly who require additional health care services. The reduced demand caused by the improved health status of the former smokers is offset by extra care needed by the 2 TIMN 358275 ..~.~

additional elderly. There might be some initial reduction in the demand for health care if smoking was reduced. The improvements in health status would presumably occur before the age structure was significantly altered. However, in the long run the two effects offset each other. Despite the fact that total health care dsmand may be little affected by smoking, Medicare's finances are almost certainly affected. The reason is that it is a prepaid health insurance annuity for those aver 65. Medicare does not bear the higher health costs of nonelderly sac1cers, 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 nosumokers. Wright (1986) estimates that each person who quits smoking increases the deficit faced by the HI component of Social Security for just these reasons. • 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 taxes, benefits, and transfers for members of the 1920 birth cohort. We do this for those who earn median wages for their age and cohort and for those who eara 60 percent of the median, in each case beginning at age 20. The results can be previewed by saying that we find the expected loss in net Social Security benefits 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 due to excess morbidity and mortality, and is perhaps tan times greater than the corresponding Medicare figures of Wright. The next section of the oaper briefly reviews what is laiown about the effect of smoking on mortality. It discusses disease specific effects and also our technique of using mortality ratios to yield approximate separate life 3 TIMN 358276

tables for smokers and nonsmokers. The third section of the paper describes our simulation procedure for calculating the Social Security costs of smoking. It presents separate results for single individuals, one-earner and two-earner couples because of their separate treatment by Social Security. We conclude the paper with an interpretation of what our findings imply about thu private and social incentives to quit smoking. I 2: EFFECT OF SMOKING ON MOSTALITI There can be no statistical doubt that smoking is associated with increased mortality hazard rates. The overall finding of the 1979 Surgeon General's report on tiae subject was that ths mortality of all male cigarette smokers is about 170 percent of that of male nonsmokers. For two-pac3r a-day smokers, the average mortality ratio is 200 percent. For particular diseases the relative hazard is even greater~. For-exampls, two separate studies find smokers are between 9 and 15 times more likely than nonsmokers to die of lung cancer (Lubin at al. (1984) and Cowell and Hirst (1980)). The risk of dying of arterosclerotic and degenerative heart disease and myocardial insufficiencies has been estimated at 2.7 times as great for smokers as nonsmokers (Cowell and Hirst (1980)). There is further evidence that there is a significant interai~cion between smoking and other environmental factors such as exposure to asbestos. The finding is that while smoking is a major cause of lung cancer, smoking combined with other assaults (such as industrial exposure) greatly incra-Uses the mortality hazards (Schneiderman and Lsvin (1974). Our development of separate life tables for smokers and nonsmokers utxflizes the findings<of E.C. Hammond (1966) regarding the effect of smoking on mortality. Working for tize American Cancer Sociery, he conducted a comprehensive four-year study tracking a population of over one million subjects. He determines the death rates and the prevalence of certain causes of death for 4 - ---~" TIM~ 358277

smokers and nonsmokers of many different characteristics. The technique was to examine death certificates for the cause of death and to request information from the attending doctor whenever cancer was mentioned on the death certificate. Hammond's results are a very detailed set of mortality ratios1 for different types of smokers and for several different causes of death. In 1959 and 1960, Fiammond enrolled over one million volunteers from twenty-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 smoking, daily amount of smoking, and degree of smoke inhalation. Each subject was contacted annually for four years to track the number and timing of fatalities in each group. Death certificates were received for over 97% of reported deaths to provide better information as to causes of death. IIsing the accumulated data, Hammond combined subjects with similar characteristics into five-year and ten-year age cohorts, and divided the number of deaths in each cohort during the study period by the number 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 r, of his findings is shown in Table 1. The separate mortality tables that we have produced are contained in the Appendix to this paper. The basic life tables used are the cohort life tables for men and women 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 women. If we let Q~(4) represent the one-year death probability for males as a function of age (similarly Qw(a) for females), TIMN 358278