Longer life expectancies raise the bar on pensions

Americans are living longer. That’s good news for people–but it’s creating challenges in the world of traditional defined-benefit pensions.

American men are living an average of two years longer than they were in 2000 (the last time the tables were revised), and women are getting an additional 2.4 years of life, according to new mortality projections from the Society of Actuaries (SOA). The SOA is the official keeper of the mortality tables used to calculate the value of future pension obligations, and longer lives mean greater cost for plan sponsors.

Those new tables, released last month, will give employers additional reasons to “de-risk” their pension plans by offering lump-sum buyouts to retirees and former workers, or transfer their obligations to private insurance companies by buying huge group annuities to pay out benefits. That, in turn, will force workers and retirees to make some tough decisions about their benefits.

The SOA projections are updated periodically, and they are used by plan sponsors and regulators to measure the cost of pension plan benefits. The new projections utilized data from about 2 million participants in pension plans over a five-year period, plus the SOA’s own projections of anticipated future mortality improvement.

The projection is based only on one slice of the American population–workers receiving pensions, but it does reflect a broader trend. Average life expectancy in the United States rose by almost eight years from 1978 to 2011, to 78.7 years, according to the Organization for Economic Cooperation and Development (OECD).

According to the SOA, the gains reflect several factors: decades of improved access to health care, notably Medicare and Medicaid for the elderly, disabled, and poor; the discovery and availability of antibiotics and immunizations; clean water supply and waste removal; and the rapid rate of growth in the general standard of living.
“Access to health care and technology have played a large role,” says Dale Hall, the SOA’s managing director of research.

Clarifying the Longevity Data

Numbers like these often are cited to justify a range of retirement-related policy ideas–cutting entitlement spending, encouraging people to work longer, or delaying Social Security benefits. So before we continue, a few words of clarification about what the SOA projections mean–and what they don’t mean.

First, the gains in longevity aren’t evenly distributed among the population. Along with the gender gap, the SOA data show that higher-income white-collar workers outlive blue-collar workers (see table). Other research also points to a sizable longevity gap by educational attainment and race.

SOA-life-expectancy1

And in a global context, it’s worth noting that the U.S. is no gold medalist in the longevity Olympics. The OECD reported last year that the average life expectancy among its member nations is now higher, at 80.1 years, than the U.S. average. (The OECD comprises most of the world’s major economic powers, including the United States.)

Longevity gains from age 65 are even more telling, because they wash out deaths due to infant mortality as well as most violent and accidental deaths. Here, Americans are near the bottom of the ranking of 34 OECD member countries. The only countries with smaller gains in longevity from age 65 over the past 50 years were Iceland, Hungary, Denmark, Greece, Turkey, Mexico, and the Slovak Republic.

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