How Rising Life Expectancies Affect Retirement

Thanks to advancements in technology and medicine, Americans today have longer life expectancies than ever before. A study conducted by the Society of Actuaries estimates that the average 65-year-old man will live to 86.6 years while women can expect to stay around until they’re nearly 89. Both of these numbers have increased by more than two years since data was last collected more than a decade and a half ago. And while this is certainly good news for humanity as whole, the outlook is not nearly as rosy for our retirement plans.

First of all, these changes place an increasing burden upon companies who contribute to their employees’ pensions. The Society of Actuaries predicts that retirement costs will increase by as much as 8 percent for many companies. In fact, General Motors recently announced that its funding of U.S. retirement plans will fall short by an additional $2.2 billion due to the recent mortality study. One consulting firm estimates that the country’s 400 largest pension-paying companies could see costs increase by $72 billion in the coming years. Many businesses will not be able to account for this jump, leading to shortfalls like GM’s across the board.

Workers at large companies are at the highest risk of seeing their employer’s retirement contributions drop. According to the Bureau of Labor Statistics, 41 percent of employees at companies with a staff of 500 or more participate in pension programs. Executives may try to reduce those numbers by offering workers lump-sum buyouts of their retirement accounts. Companies are also expected to outsource their pension liabilities more frequently to insurance companies and other financial firms. Meanwhile, those who contribute to their own retirement plans are advised to be wary as well. As life expectancies continue to grow, workers may be forced to place more of their monthly income into their 401(k)s or risk running out of cash once they retire.

 

Questions:

  1. As age expectancy continues to rise, will the retirement age rise as well?
  1. Will retirement plans at large companies continue into the future?

 

Source: Michael Rapoport, “Longer Lives Hit Companies with Pension Plans Hard,” The Wall Street Journal, February 23, 2015. Dan Fitzpatrick, “Rising U.S. Life Spans Spell Likely Pain for Pension Funds,” The Wall Street Journal, October 27, 2014. Photo by: American Advisors Group.