Question

Should the value of a statistical life be adjusted for a person’s age or health status? For instance, in the early years of George W. Bush’s presidency, the Office of Management and Budget proposed using a lower VSL for senior citizens than for younger people. Other proposals suggested using a lower VSL for people with serious or chronic illnesses. What are the implications of using different values for different groups of people? What justifications
might exist for having different VSLs? What reasons are there for using the same VSL for all people?

Answer 1

This answer given by me is based on a research done on this particular topic. For further details please contact through review

The scientific basis for the value of statistical life
A substantial scientific literature in economics has developed estimates of the VSL.
Government agencies, most notably the EPA, have made a serious attempt to grapple
with the implications of the individual studies, reviews of the literature, and
meta-analyses of the literature. These agencies should be encouraged to continue to do
so, with the advice of peer review scientific advisory panels having the same stature
as those that assist the agency on a variety of other scientific issues, such as the hazards
of chemical exposures.
There should be no set template for the best VSL estimate. Contrary to the strictures
that would be imposed by the “Restoring the Value of Every American in Environmental
Decisions Act,” the VSL amount may even decline over time depending on how estimates
are refined in the literature. The procedure for picking the VSL estimate may take any of
a number of forms. The best estimate from a meta-analysis might be picked, such
estimates might be averaged or combined in some fashion, or perhaps a definitive single
study could serve as the guide. Regardless of the approach taken, there should be a sound
justification for the weight accorded to the particular studies rather than combining the
results in a mechanical fashion. Greater weight should also be accorded to studies using
state-of-the-art fatality rate data and methodologies, so that a meta-analysis including all
studies may not be ideal.
If future research resolves heterogeneity differences more satisfactorily than at
present, then recognition of differences in the VSL might be incorporated, depending on
the policy context. One situation in which incorporating heterogeneous VSL amounts is
compelling is when the beneficiaries of the policy are bearing the cost, so that in effect,
they are paying for the greater safety. Airline safety regulations that raise passenger ticket
prices and auto safety standards that raise the price of automobiles are notable examples
that fit the scenario wherein the beneficiary pays for the policy. Failing to provide safety
to those who value it and providing more costly safety policies to those who don’t want
to pay for such improvements will generate economic efficiency losses in situations in
which there are market-like transactions wherein people must pay for the costs of the
regulation.Recognition of heterogeneity across the population does have substantial precedent
in other contexts. Wrongful death awards for court cases increase in value with factors
such as personal income and remaining work life, so the idea that heterogeneity might be
recognized is incorporated in the judicial system’s handling of ex post compensation.
Such awards have a different purpose in that they are designed to provide compensation
for the economic loss of the survivors, which is a quite different matter than reducing the
risk of death for people who are still alive. If, however, the policy costs are spread more
generally, then not distinguishing different levels of the VSL may be less controversial
than making such distinctions.
Although the EPA’s analyses that led to the devaluation of life controversies were
not entirely sound, on balance the controversies have done a disservice to the agency.
The EPA has consistently been a leader in incorporating the results of the academic
literature in its analyses, and for years has used VSL levels that have been among the
highest in the Federal government. The senior discount procedure and the devaluation
of life by the EPA Air Office were well-intentioned attempts by the agency to incorpo-
rate age differences in the VSL and to recognize the implications of the more recent
meta-analyses in the economics literature. That these efforts received such sharp criti-
cism stemmed not so much from the absolute levels of the VSL that were being used
but from the direction of the change. Downward adjustments in values will generate a
wide variety of irrational behavioral anomalies, and the criticism of the agency
reflected these biases in public reaction. By establishing a scientifically based, peer
review process for setting VSL levels, the EPA and other agencies will be able to utilize
the best evidence from the economics literature, regardless of whether this evidence
increases or decreases the VSL.

The “senior discount” and the complex effects of age

The first policy controversy this article will address is the EPA’s use of a lower VSL

amount for older people whose lives were being extended by the proposed Clear Skies

regulation. This regulation had a differential effect on the survival rates of different agegroups. Mortality rates increase with age generally. Moreover, for the particular individu-
als likely to benefit from the regulation, there may be additional health impairments that
affect mortality risks. People with respiratory conditions are most susceptible to the risks
of air pollution, so the benefit values are quite sensitive to the VSL amount used for
people over the age of 65, which is the age group for which most of the risk reductions
were estimated to occur. The EPA’s move to provide a breakdown of some of the age
distribution of the effects is commendable in that it provides additional information to
policymakers regarding who is being protected and to what extent.13 In terms of raw
demographic statistics, it would also be useful to have detail beyond the age ranges
affected. For people over age 65 whose lives are being extended, will they otherwise have
normal life expectancy, or do they have advanced respiratory ailments that will limit their
remaining lifespan to several months? Such information is useful in assessing both the
willingness to pay of the group being protected and the appropriate value that should be
attached to their life extension. The value of a statistical life year (VSLY) is particularly
attractive when there are potential victims with extremely short life expectancies due, for
example, to advanced respiratory diseases.14
The summary information based on reductions in long-term exposures to pollution
by the Clear Skies initiative provides a general sense of the magnitudes involved.15 The
annual fatalities that the EPA estimates will be prevented are 1,900 for adults aged 18 to
64, and 6,000 for adults aged 65 and over. The estimated benefit from the reduced
mortality risk is $11.6 billion for adults aged 18 to 64, based on a VSL of $6.1 million. The
main benefit estimate provided by the EPA used this uniform VSL figure. However, the
EPA also reported a sensitivity analysis using an age adjustment for people over the age of
65. The benefit derived from adults 65 and older is $36.6 billion using the same VSL of
$6.1 million across the population, and $23.1 billion based on the EPA’s 37% senior
discount adjustment, which would be a VSL of $3.8 million.16 Thus, the senior discount
is not just of symbolic importance: it reduces the estimated benefits from the policy effort
by more than $13 billion annually. However, even though the VSL amount is reduced, it
is not entirely out of line with what agencies in the Federal government other than the
EPA have used. Other countries have also used a senior discount in regulatory analysis.17
It is the downward adjustment itself – and the idea that age is an acceptable basis for a
downward adjustment – rather than the amount that may have been most problematic.
The Clear Skies initiative analysis was the first EPA use of a senior discount, but it was not
the EPA’s first use of the senior discount approach: that occurred during the Clinton
administration in an EPA sensitivity analysis of the 2000 highway diesel rule.18
The selection of a 37% age adjustment was not an arbitrary choice. It was based on
stated preference results reported by Jones-Lee et al. (1985) for traffic safety in the UK.
The selection of this particular figure does, however, raise some legitimate economic
questions. First, the different traffic safety risk questions yielded age-related patterns,
some of which indicate a positive age–VSL relation and others which indicate a negative
relation; and some of which were statistically significant and others which were not. The
age results were simply not robust across different formulations of the safety risk ques-
tion. Second, VSL levels estimated for the UK have always been quite different from those
found in US studies (Viscusi 1993 and Viscusi & Aldy 2003 review the international
evidence). Given the quite different income levels and social insurance structures in the
two countries, transferring the age-related results across countries surely requires some
adjustments or cautionary warnings regarding the exploratory nature of the exercise.The concept that the VSL might vary by age group is certainly reasonable in that a
person’s willingness to pay to reduce risk may vary over his or her lifetime, making some
kind of adjustment appropriate. Although the EPA effort expanded the age adjustment
debate rather than resolved it, the agency should be commended for recognizing that
there may be legitimate differences in VSL amounts across the population that should be
taken into account in policy assessments.
As a practical matter, however, this sensitivity analysis that explored possible age
differences in the VSL was not a success. What generated the controversy was the EPA’s
seemingly arbitrary devaluation of the lives of people over age 65 by 37% compared to the
values for the rest of the population. Elderly citizen groups, such as the AARP, launched
a series of public protests against what has come to be known as the “senior discount” or
the “senior death discount” (for representative press coverage, see Wall Street Journal
2003, The Washington Post 2003, and Washington Times 2003). EPA regulatory policies
also may attract substantial scrutiny because of the large stakes involved, the involuntary
nature of many environmental risks, and public perceptions of the importance of envi-
ronmental quality. After a wave of adverse publicity, the EPA rescinded its age-adjustment
approach.
On a conceptual basis, it certainly does not seem entirely unreasonable that the VSL
declines steadily with age. Purchasing a risk reduction at age 10 has a much greater effect
in increasing life expectancy than purchasing a risk reduction at age 70. And if the risk at
age 10 is not reduced, that person may never reach age 70 to have the opportunity to pay
for reduced risks at that age. Because the expected amount of life being protected declines
steadily with age, there are some simple economic frameworks for which one can show
that the VSL peaks at birth and declines steadily with age.19 Those simple models use very
strong assumptions, such as the ability to borrow at birth based on future earnings, and
they also abstract from important changes that occur over an individual’s life. After being
raised by your parents and educated, you in effect become a different person from an
economic standpoint, with quite different labor market opportunities and a different
willingness to pay for risk reduction. Similarly, other life-cycle changes, including possible
marriage, financial responsibilities for children, and wage patterns, will impinge on a
person’s willingness to pay for risk reduction. Part of this concern may reflect a person’s
valuation of the importance that others place on his or her survival. Ultimately, whether
the VSL increases or decreases over time, and to what extent, is an empirical question that
requires that we ascertain how this willingness-to-pay amount to reduce risk varies with
age.
At the time of the EPA assessment, the literature on age differences in the VSL was
not well developed.20 As a result, the OMB (2003) guidance with respect to the
heterogeneity of the VSL is quite cautious. The OMB indicates that the EPA Science
Advisory Board thought that the estimates were not sufficiently refined to provide for
different VSL estimates based on the cause of death, such as cancer, or whether the risk
was incurred voluntarily or involuntarily. The OMB is quite explicit in opposing age
adjustments in the VSL amount.21 The OMB does, however, permit presenting results
based on a single VSL amount for all age groups coupled with a sensitivity analysis that
shows the results using VSLYs (OMB 2003, p. 147). Because young people generally
have a greater life expectancy than older people, this approach will lead to higher values
being placed on mortality risks to the young.22 However, the OMB would temper such
an effect by using a higher VSLY for older people, because “senior citizens face largeroverall health risks from all causes and they may have accumulated savings to spend on
their health and safety” (OMB 2003, p. 148, footnote omitted). The OMB does not
explain the extent to which there should be an increase in the VSLY with age, but the
general thrust of the guidance should serve as a cautionary alert. The early labor
market studies of the VSL relied on worker fatality risk data that did not account for
differences by age, and the econometric formulations used typically did not allow for
substantial flexibility in the relationships between age, fatality risks, and wages. Survey
studies likewise did not explore the age variations extensively. The senior discount con-
troversy has stimulated substantial research to examine the age variation in the VSL.
Much of my commentary on whether the EPA approach was valid exploits research
findings not available at the time of the EPA analysis, thus taking advantage of
hindsight.
As more refined labor market fatality risk data by age have become available, econo-
mists have been able to estimate how the VSL varies across the population and over the
life cycle, which will reflect changes in wealth with age. In much the same way as people’s
total consumption increases over time, peaks in middle age, and then declines somewhat
as a person ages, the VSL likewise displays an inverted U-shaped pattern (see Kniesner
et al. 2006, Viscusi & Aldy 2007, and Aldy & Viscusi 2007, 2008).23 But what is interesting
is that the upward trajectory when people are young is much steeper than the downward
trend after age 60.24 If we use the age-adjusted VSL estimates in Kniesner et al. (2006), the
benefit estimates of the Clear Skies initiative for people age 65 and over is $37.1 billion,
which actually is somewhat higher than what the EPA estimated when applying no senior
discount.25 Some other recent estimates indicate that there may be little effect of an age
adjustment, or there may be some decline in values with age. However, most studies
suggest that the VSL for people in their 20s is actually less than that for people age 60,
notwithstanding the difference in their future lifespans. Stated preference studies likewise
have examined the variation of the VSL with age and offer the advantage of providing
evidence for people over age 65, many of whom do not work and whose preferences will
not be reflected in hedonic wage study estimates. The results of these studies are reviewed
by Krupnick (2007), who finds that the evidence is mixed as to whether the VSL declines
with age and to what extent.
It is not entirely surprising that the VSL might not plummet when we age. Individual
willingness to pay for risk reduction is linked to one’s financial resources, and older
people may have more funds with which to purchase reductions in risk. We do not
observe people over 65 taking up smoking, stopping the use of seatbelts, buying cars
without safety equipment, and engaging in highly risky lifestyles, even though their life
expectancy has been reduced. What matters from the standpoint of benefit valuation is
whether the personal willingness to pay for risk reduction has declined, irrespective of
whether a third party government policymaker thinks that people should be willing to
pay less for risk reduction if fewer years of life are being saved.
While there is no consensus regarding the extent of the decline in the VSL with age,
such estimates may be refined in future research. Labor market studies have by necessity
focused on the working age population, so subsequent declines in the VSL beyond
retirement age would not be captured except through extrapolation of age-related trends.
It also may be the case that people with extremely short remaining life, such as people
with terminal diseases, may have lower VSL figures, so that age-related changes in
individual health status may be influential as well.The prospective policy evaluation question is what use, if any, should be made of
recent findings on age-related differences in the VSL. Framing the issue as one of equity
is not conclusive. Using the same VSL for all people irrespective of their willingness to pay
for safety is symmetric, but the lives being saved by these policies are not. Uniform VSL
amounts will place a higher value per expected life year saved for the old than for the
young, which can be viewed as an inequity in spending on risk reduction.26 The EPA’s
senior discount for the elderly nevertheless placed a higher VSLY for their lives than for
those under age 65. Graham (2008) calculates that the VSLY for people under 65 in the
Clear Skies analysis was $172,000, whereas the VSLY implied by the senior discount was
$434,000 for people over 65. That the VSL and the VSLY remain high as a person ages is
mainly a consequence of greater wealth at the end of the life cycle. By failing to decrease
the VSL with age, analysts are implicitly according substantial weight to income effects,
which is inconsistent with a broader announced policy of ignoring income.27 Ultimately,
the only sound basis for valuing risks is to examine individuals’ willingness to pay,
irrespective of the differences these values may generate.
The economic efficiency norm is to use the willingness to pay of the protected
population as the guide. Thus, if there is a well-established heterogeneity in the VSL, then
these differences could be taken into account. Given the present state of research,
however, the extent of the discount, if any, which should be applied to reducing risks to
older populations is not clear. One possibility is to shift from a VSL benefits measure to
a VSLY approach, which assumes that each year of life is equally valued. This approach
was specifically not recommended for the EPA policy by the Cropper et al. (2007) EPA
Science Advisory Board Environmental Economics Advisory Committee memorandum,
and is not consistent with recent empirical evidence reported in Aldy and Viscusi (2008).
Likewise, a National Academy of Sciences (2008) report did not endorse either the use of
the VSLY approach or placing a dollar value on quality-adjusted life years (QALYs).
The overall assessment of the EPA’s decision to use a senior discount for the VSL is
mixed. Conceptually, the VSL amount may decline with age at some point, and subse-
quent studies may show that adjustments of this type are warranted. But the evidence we
have to date for the working-age population does not indicate a precipitous dropoff in the
VSL in one’s 60s. Indeed, workers in their 60s reveal a higher VSL in their job choice
decisions than do workers in their 20s. Had the EPA documented the more tenuous
health status of the particular groups over age 65 whose risk would be reduced by the
policy, then it might have been clear that the extension in the life expectancy generated by
the policy would be very short. A shortened life expectancy would make a reduced
willingness to pay for the policy more plausible, but does not necessarily indicate that a
lower VSL is appropriate (for further discussion of this issue, see Hammitt 2007). In the
EPA’s defense, it should also be noted that the VSL amount after being reduced by the
senior discount is still well within the range of values used by other agencies in the Federal
government. The EPA analysis fell prey to anchoring biases as people judged the VSL
relative to the VSL amounts the EPA applies more generally, which are the highest in the
Federal government.