The Real Effects of the Recent Life Expectancy Shock

In the United States, the excess deaths due to COVID-19 resulted in an overall decline in life expectancy of 1.5 years, the largest drop since World War II. This paper examines the economic consequences of this change in life expectancy. We find that the significant decline in life expectancy led to a substantial reduction in defined benefit pension contributions. This pension contribution relief, in turn, led to increased capital expenditure. Additionally, we observe that the effects of pension contribution relief on capital expenditure are more pronounced in firms with higher pre-shock levels of financial constraints. Furthermore, we document firms’ responses in terms of increased R&D expenses and external equity financing following the change in life expectancy. Our study also reveals that the significant drop in pension contributions was primarily driven by the temporary drop in life expectancy rather than by COVID-19-related deaths. Given that mortality rates are expected to decrease post-pandemic, firms that experienced a temporary reduction in pension contributions may face increased mandatory pension contributions in the future.