July 17, 2008

Individuals must make plans for their future without knowing how long they will live in reality.  This makes retirement planning very difficult due to uncertain life expectancy, says Healthcare Economist.

Would you be willing to trade some of your life expectancy in order to be more certain of the date you will perish?  In his working paper, "The Cost of Uncertain Life Span," Ryan D. Edwards of the National Bureau of Economic Research (NBER) attempts to answer this question:

  • The average individual, who values an extra year of life at about $200,000, would be willing to pay about $40,000 to know that they will die at age 80 in country A versus age 78 in country B, which is the present discounted value of those two extra year of life.
  • Edwards argue that you need to know more than just life expectancy to get your money's worth; suppose you were told that your life span is also more uncertain in country B, where there is a 20 percent chance you will die before age 65, as opposed to a 12 percent chance in country A.

Now how much would you pay to live in country A? 

  • A reasonable answer, says Edwards, is about $60,000 in total, or an extra $20,000 to avoid the heightened uncertainty in life span.
  • Edwards calculates that "one less year in standard deviation is worth about half a mean life year."

Further, health inequality must be larger between rich and poor countries than is implied by life expectancy alone, since life-span uncertainty is surely higher in developing countries.  Countries such as the United States and France have a relatively high variance of life expectancy while Sweden and Japan have very low levels of life expectancy variance, says Edwards. 

Source: "Would You Give Up Some Life Expectancy to Know The Day You Will Die?" Healthcare Economist, July 11, 2008; based upon: Ryan D. Edwards, "The Cost of Uncertain Life Span," National Bureau of Economic Research, Working Paper 14093, June 2008.

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