I have frequently written about longevity as being the major risk of retirement. I am not alone in highlighting this risk, as it is widely regarded as one of the primary risks in retirement among researchers like Wade Pfau and Moshe Milevsky. And it is a very difficult force to contend with. The American way is to extend life, buy health care, and to deny mortality. There’s nothing wrong with that either.
However, when it comes to retirement income planning, longevity can have devastating consequences. Indeed, it is the great unknown and juggernaut of the planning profession- no one knows the day they draw their last breath, so therefore, no one knows how to optimize their assets for income production up to that last day…. it’s a risk, that must be either offloaded on an insurance carrier (annuities) or self insured (excess wealth). And it’s a risk that grows with each passing year.
Early in the 20th century, life expectancy in the United States was 47 years now newborns are expected to live to 79 years. This corresponds to about three months additional lifespan with each year that goes by.
Extend this trend, and by the middle of the 21st century, year 2050, American life expectancy at birth will be 88 years, and 100 years by the end of the century.
What does that mean to our social support systems, retirement incomes, and our economy? Is it feasible to have Social Security income commence at age 62, when 35 or more years of life may be ahead of that young retiree?
Is it reasonable to expect a private individual to save enough money in their working years to spend nearly as many years not working? Is it reasonable for society to support that assumption? What is the line between social support systems and entitlements? Social Security was originally intended as a support system for the needy, and not as a primary retirement income vehicle. Furthermore, it was designed in a time when people’s lifespan was only 65 or 70 years. It is dangerously out of touch with reality at this time, but is such a political hot button that it is untouchable. It is a fundamental right now, up there with Life, Liberty and the Pursuit of Happiness…. what politician would dare challenge it?
The Atlantic, a monthly newsmagazine, recently tackled the issue of longevity. It is a provocative article, and there are a wide range of views, including countering views from one professor advocating a shorter lifespan as being a healthier and more fulfilling expectation. The issue is well worth reading.
Here is a great quote from the October 2014 issue, “What Happens When We All Live To 100?” by Gregg Easterbrook
In 1940, the typical American who reached age 65 would ultimately spend about 17% of his or her life retired. Now this figure is 22%, and still rising. Yet Social Security remains structured as if longevity were stuck in a previous century. The early-retirement option, added by Congress in 1961 – start drawing at age 62, though with lower benefits – is appealing if life is short, but backfires as life span extend. People who opt for early Social Security may reach their 80s having burned through savings, and face years of living on a small amount rather than the full benefit they might have received. Polls show that Americans consistently underestimate how long they will live – a convenient assumption that justifies retiring early and spending now, while causing dependency over the long run.
Perhaps 99% of members of Congress would agree in private but retirement economics must change; none will touch this third rail. Generating more Social Security revenue by lifting the payroll tax cap, currently at $117,000, is the sole politically attractive option, because only the well-to-do would be impacted. But the Congressional Budget Office recently concluded that even this soak the rich option is insufficient to prevent the insolvency for Social Security at least one other change, such as later retirement or revise cost-of-living formulas, is required. A fair guess is that the government will do nothing about Social Security reform until a crisis strikes – and then make panicked, ill considered moves that foresight might have avoided.