Additional muscle is positive for health, but only up to some reasonable threshold. There is no health benefit to having very high levels of muscle, and in fact it may be negative for your health at extreme levels. E.g. many bodybuilders have trouble breathing, sleep apnea etc.
Both people in the example have 60lbs of fat. 1lb of muscle doesn't cancel out the negative health effect of 1lb of fat
It’s not the fat that kills. It’s oxidated lipids that kill.
1. https://www.cdc.gov/nchs/data/series/sr_03/sr03-046-508.pdf
As for 2, men in the US are getting shorter because of immigration which adds many confounders.
https://medlineplus.gov/ency/article/003998.htm
"People typically lose almost one-half inch (about 1 centimeter) every 10 years after age 40. Height loss is even more rapid after age 70. You may lose a total of 1 to 3 inches (2.5 to 7.5 centimeters) in height as you age."
So people DO in fact tend to lose about 2 inches at age 80 versus their younger selves.