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Table 1 Hortality Ratios for Smokers as Detesmined by E. C. Ha-ond Current Number Per Day Ag. 35-44 45-54 55-64 63-74 75-84 lien vi.th History of Only Cigarette Smoking 1-9 * 1.84 1.33 1.50 1.36 10-19 1.36 2.26 1.92 1.65 1.55 20-39 1.91 2.41 2.05 1.71 1.26 40+. 2.59 2.76 2.26 1.81 * Qom.n with History of Only Cigarette Smoking 1-9 0.90 0.95 0.99 1.09 1.07 10-19 0.97 1.22 1.31 1.18 1.21 20-39 1.35 1.54 1.46 1.51 * 40+ * 1.96 * * * * Signifies a very low number of expected deaths (small sampl• or low death rate). SOURCE: Hammond, p.133. 6 ~ TIMN 358279

let e(a) represent the fraction of inen who smoke as a function of age, and iSm(a) represent the mortality ratio of male smoker to nonsmoker as a function of age, then Qa (a) QNS(a) - 1 - fa(a) (1 - 2e(a) ) and QS(a) - Ie(a) x QNS(a) where (a) is the snnual death probability of male nonsmokers as a function of age and QS(a) is the annual death probability for male smokers. The formulas for women are identical with all the superscripts changed to w's. The appendix tables displaq_tlze assumptions for km(a) and Hw(a), derived from Fi-- ond (1966), and for fa(a) and fw(a) for the 1920 cohort, derived from Harris (1983). They also show the results for QNS(a), QS(a), QNS(a), and QS(a). Table 2 offers some summar,q statistics based on these derived life tables. Our life tables for the 1920 birth cohort show that 85,758 males and 88,787 females out of 100,000 births live to age 20. It is well known that smoking affects the mortality of women less than men. That is partially due to the fact that women smokers smoke less, inhale 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 TIMN 358280

Table 2 Life Ezpectaacy, Median Age at Death, And Surviving Population at Ages 20 and 65 For 1920 Birth Cohort Survivors Surrivors Xediaa Median at age 20 at age 65 Life Life age of age of out of out of expectancy expectancy death death 100,000 100,000 conditional conditionall conditional conditional births births on age 20 on age 65 on age 20 on age 65 man Smokers 85,758 53,051 68.7 78.8 70 77 Noasmokars 85,758 67,465 75.1 81.5 77 81 Qomea Smokers 88,787 ' 69,303 77.2 84.6 79 84 Nonsmokers 88,787 74,461 80.5 86.6 84 86 8 . .._, .r TIMN 358281 .

62 percent of smokers do so. At age 20, male smokers have a life expectancy 6.4 years shorter than male nonsmokers, and a median age of death 7 years yotmger. 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 th. life expectancy difference at age 20 is 3.3 years, while the difference at age 65 is 2 years. Our life tables cannot sort out causality and correlation. It is certainly true that smokers would not become identical to nonsmokers if they stopped smoking. Smokers drink more alcohol than 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. We 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 consumption. 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. SIMULATION OF THE SOCIAL SECIJRIIY COSTS. OF SM0KING. We examine the Social Security consequences of smoking for 100,000 men born in 1920 and 100,000 women born in 1923. The 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. We calculate the Social Security outcomes separately for single men, single women, and one and two 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 number 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 TIMN 358282

at retirement widows must choose between a benefit based on their own work record and one based on that of their spouse. In the case of the one earner couples, we assume that the husband is employed until retirement or death. If the husband should die before retirement, the widow is assumed to work until retirement or death. Qe have not been very sophisticated in developing our earnings profiles. The earnings series used are median earnings for men and women working full- time year-round, taken from the Census Bureau Current Population Report P-60, No. 142 (1982). Earaings before 1955 and 1982 are estiaated using a related series from the Department of Labor's Employment, Hours, and Earnings report. The earnings series are then adjusted to reflect a life-cycle pattern of lifetime earnings, using Cansvs data on mean incomes for different age groups from Report P-60, No. 137. Our analysis for low wage earners examines those who earn 60 percent of the median earnings profiles. There are several factors which could be added to our earnings series. First, we do not take into account the effect of th. increased morbidity of smokers on their earnings pattern. This is probably a relatively minor adjustment, but one which is conceptually desirable. Second, nonworking wives entering the workforce when widowed are assumed to immediately earn the median (or 60 percent of the median) amount for their age. This is certainly optimistic regarding their prospects. Finally, we do not take into account spells of unemployment, employment in the uncovered sector, or disability. The surviving members of the cohort are assumed to retire at age 65 and begin to receive benefits based on the 1985 Social Security law. We assume that the initial benefit received is fully indexed for inflation for their remaining life. The women in the simulations recire three-years later, simply reflecting that they are three years younger than the men. Because the median earnings of men exceed those for women, the Social Security OASI benefit based on a man's 10 TIMN 358Zg

earnings history exceeds the benefit based on a woman's work record. As a result, husbands and widowers will always elect to take their own benefit. tJives choose between their own benefit and one-half of their husband's, while widows may elect to receive their own benefit or the benefit which their husband would receive were he alive and had not worked since the year he actually died. In other words, a woman whose husband died in 1965 could take the ben,efit he would be receiving had he stopped wor3cing in 1965 and lived to receive his benefit, or she could take her own benefit. In the two-earner 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 assume she only begins work upon her husband's death. This means that a vidow's benefit may depend on when her husband died (and in the one-earner case must depend on it), necessitating our keeping track of the •widow cohorts' mentioned above. Wives over the age of 65 whose husbands are still slive will always receive one-half of their husband's benefit in the one-earner family, since they have no earnings history of their own. In the two-earner 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 compar:&on 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 rate used for cash flows occurring at other times is 3 percent. With 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 transfar from Social Security of $3,436, while the expected benefits received by smokers fall $17,782 short of the expected contributions. ?,11 of these figures are conditional on having survived to age 20. The Social Security cost of smoking for single men with median Il -- _ --- ~ TIMN 358284 ';

Table 3 Present Value of Social Sacuritp Benefits and Taxes (in 1985 $) And Intaraal Rata of Asturn to the Social Sacurity Program For Members of the 1920 Birth Cohort Real N.t Internal Expected Expected Present Rste of Present Present. N.t value Real Return value value Expected ' Conditional Internsl Conditional of OASI of OASI Present On Surv,iving Rats of On Surviving Benefits Taxes value IInti1 Ags 65 8sturn Until Age 65 Median Earnings Profile Men Smokers 53,497 71,279 -17,782 3,721 1.87 3.18 Nonsmokers 79,436 76,000 3,436 18,218 3.17 3.78 Women Smokers 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 • - - - - - - . - - - - • - - - - - • - - - - - - - - 'rfen Low (60% Median) Earnings Profile 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 Women Smokers 47,159 34,431 12,728 23,166 4.06 4.65 Nonsmokers 54,556 35,036 19,520 27,801 4.47 4.88 12 T~MN 358~85

earnings patterns thus exceeds $21,000. The internal rate 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 internsl rate of return for median wage male smokers in this cohort is,3.18 percent, whereas the rate for nonsmokers is 3.78 percent. The ' . .~ . . , dollar difference in the net transfer between male 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 . , .~ I , . . . 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 difference in the net transfer to median wage women nonsmokers and smokers is slightly more than $9,000. The real internal rate of return for smoking women is 3.45 percent, while the figure is 3.87 percent for nonsmokers. Conditional 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 the 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. We 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 are shown in Table 4. One earner co uples receive larger transfers and a higher rate of return from Social Security because of . . -». . .... _ . .. - . . _ the benefits received by the nonworking spouse. The Social Security expected cost of smoking is similar for couples in either circumstance. The net TIIVIN 35828

Table 4 Present Value of Social Security Benefits and Taxes (in T985 $) And Internal Rate of Return to the Social Security Program For Members of the 1920 Birth Cohort Median Earnings Profile Real Net Internal Expected Expected Present Rate of Present Present Net Dalue Real Return Value value Expected Conditional Internal Conditional of OASI of OASI Present On Surviving Rzte of On Surviving Benefits Taxes value Until Age 65 Return Until Age 65 Married (one earner) Both Smoke 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 Male smoker 128,748 79,722 49,026 92,123 4.67 5.67 female nonsmoker Female smoker 139,353 male nonsmoker 80,860 58,493 87,010 4.93 . 5:43 2Ssrried (tvo earaers) Both Smoke 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 Hale smoker 138,313 129,673 ' 8,640 48,103 3.22 4.04 female nonsmoker Female smoker 151,494 133,386 18,108 48,402 3.46 4.05 male nonsmoker ' YOTE: Figures are per household. , 14 TIMN 358287

expected present value of participation in Socia7. Security is $29,467 lower for one earner 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, whereas if only the vife smokes the loss, is $9,732 relative to a one .arner couple in which neither smokes. To put these figures in perspective, one might note that the median earnings o£ 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 numbers for tsro earaer couples are that their expected net Social Security transfer is $30,567 less if both spouses smoke than if neither does. The real inteznall rate of return for two earner couples in which both smoke is 44 -.n 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 annual earnings of_women is-abo_ut_$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 two-earner couples. For t 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 men as it is for women. The dollar costs to smoking are greater relative to earnings for low wage households than for median earners. the The gain in Social Security benefits that accrue to the nonsmoker, or to smoker who quits, rearesents an equall and opposite drain on Social Security funds. This drain is only partially offset by the.increase in preretirement ?5 TI.___M.N 358288