Seven Billion Reasons to Worry: the Financial Impact of Living Longer

By S. Erik Oppers

Everyone wants at some point to stop working and enjoy retirement.  In these uncertain economic times, most people worry about their pension. Now take your worries and multiply those several billion times. This is the scale of the pension problem. And the problem is likely bigger still: although living longer, healthier lives is a good thing, how do you afford retirement if you will live even longer than previously thought?

This so-called longevity risk, as discussed in the IMF’s Global Financial Stability Report has serious implications for global financial and fiscal stability, and needs to be addressed now.

Here’s the issue: governments have done their analysis of aging largely based on best guesses of population developments. These developments include further drops in fertility and some further increase in longevity. The trouble is that in the past, longevity has been consistently and substantially underestimated. We all live much longer now than had been expected 30, 20, and even just 10 years ago. So there is a good chance people will live longer than we expect now. We call this longevity risk—the risk we all live longer than anticipated.

Risky business

Why is that a risk, you may ask. We all like to live longer, healthy lives. Sure, but let’s now return to those pension worries. If you retire at 65 and plan your retirement finances expecting to live another 20 years (assuming you have enough savings for at least that period), you would face a serious personal financial crisis if you actually live to 95, or— well in your 100s.

You could rely on your social security system at that point, but the program is also counting on people not living much beyond their mid-80s in most countries. Your personal financial problem multiplies by the size of the population, and, for society as a whole, becomes a very large problem.

Our analysis presents some back-of-the-envelope estimates that indicate that this longevity risk, when aggregated over all individuals, could make the global cost of aging—already recognized to be very large—some 50 percent larger still if people live just three years longer than currently expected. These extra costs could have large negative effects on already weakened private and public sector balance sheets, making them more vulnerable to other shocks and potentially affecting financial stability.

And since most individuals and their pension plans do not adequately account for longevity risk, a large part of those additional costs of aging could fall on governments, as people who run out of retirement funds will likely rely on public programs designed to combat old-age poverty, such as social security schemes. Unfortunately, in the aftermath of the economic crisis many governments do not have the fiscal room to absorb these extra costs.

Admit you have a problem

So what does the report recommend? A first important step is governments, pension funds and other providers of retirement income, and individuals should recognize they run this risk and prepare for its financial impact.

Second, the risk should be shared among government and the corporate sector. One effective way to share the risk with individuals is to have them to work longer.

A third way to deal with longevity risk is to transfer it to those that can best bear its financial consequences. For example, pension funds in the United Kingdom and the Netherlands have transferred their longevity risk to insurers for a fee.

You might think governments’ current fiscal worries eclipse aging and longevity risk; issues that are likely to start really biting only decades from now. But I argue we do need to fix the problem now for at least two reasons:

  •  First, as with all retirement-related issues, the earlier they are dealt with, the easier the solutions are. We were all told to start planning and saving for retirement in our 20s. Those who waited to get serious until they were in their 40s and 50s know how difficult it is to catch up. Similarly, governments cannot wait until the problem is “in its 50s,” so to speak.
  • Second, financial markets look forward and will—sooner or later—realize the potential effects of longevity risk on government finances. If these effects are left to languish without solutions and perceived to threaten fiscal sustainability, markets can respond long before longevity risk actually materializes—witness recent parallels in government debt markets in countries facing threats to fiscal sustainability.

So it turns out, unfortunately, that the financial and fiscal problems associated with longevity  may be a lot bigger than we thought. The good news is that if we act now, we can find solutions that limit hardship and disruption. The flip side is that if we delay action, the ultimate medicine will be a lot harder to swallow.

12 Responses

  1. Governments need to review the pension plan availed to its citizens as we foresee a situation where individuals are living longer and the sad thing is that many start suffering from old age diseases that require long term care.

    It is thus true that citizens plus the governments need to come up with remedial measures before the economies are saturated with old people who cannot be adequately supported. We definitely need to review our pension plans–this includes in Kenya where people are required to retire at 65, leaving many young people without a job because of the saturation within the job market. As such, I do foresee a situation where many people will not even benefit from their current retirement savings.

  2. The real risk of living longer is the tired, simplistic supposition of this viewpoint that productive life ends at “65” (or in the discriminatory view of industrialized countries, 50), and that everyone’s goal is to “retire.” “Retirement” is a created concept with a very short history. Living past 50, or 60, (or, in the case of my father who’s a full time attorney, better than he’s ever been at 86) shouldn’t mean the end of productivity or contribution, but — and only because of mindsets like the author’s — it does.

    If government and business were able to appreciate the value of longer-lived people, economies and qualities of life would be richer for everyone. As it is, many elders contribute invisibly, with iron barriers to jobs and no recognition other than to be ‘recognized’ as a burden, as this author suggests. Unfortunately, some of the biggest subscribers to the author’s point of view are over 50 or 65 themselves — desperately pushing others off the mountain in order to hang on to their tiny stake.

  3. Hi!
    Governments ‘live’ for the people and not vice versa. You have hardly taken into account a huge number of lives lost in wars, natural calamities and the wasteage of government funds due to bad budgetting and bad national planning since many goverments inflate their requirements for getting cuts from govt spending on frivolous schemes/projects. The highest evolved mammal should learn to reorganise his environment to suit healthier co-humans and not blabber about longevity as a ‘risk’.

  4. Hi,
    Why is it that all countries in the EU don’t have the same retirement age? I live in Ireland and the government has put up the retirement age to 68, and then you see Greece with retirement age less than 50. We need a fair system. I think the EU is doomed!

  5. Question: wouldn’t it be by far easier and healthier for international financial markets to have a small war once in a while, with say some 50 to 80 million casualties?

    It’s a proven remedy for “too long life-expectancy” AND opens wonderful oportunities for investment afterwards during reconstructuion.

    • Oh! it’s a good solution. It may be even better if the government passes legislation that all older people above the age 65 must have to go to war.

      • Another proposal: Back to the basics in insured healthcare-services. When Bismarck introduced health-insurance for workers, its services were strictly limited to re-constitute the ability for work of the insured within reasonable time (initially about a month). Anything else, that is incurable or long-time-to-cure diseases, orthesis and prosthesis –transplants hadn’t been invented yet– not related to work remained excluded, not to talk about services for those who for one reason or another –among them age– were unfit for work.

        Going back to these basics would have triple effects: bringing down the fiscal burden to provide those unnecessary services, put limits to the burden-loaded longevity and open up job opportunities of many of the young, by far better fitted to the always increasing demands for more efficiency and effectiveness at work.

  6. Longevity may not be a curse when you consider that people become youger at an advanced age. Who wants to retire at 65 and spend the rest of their lives watching TV, couch potatoe style, in nursing homes?

    People remain active and productive well into “old age,” for example Dr Michael De bakey died at 96 and ceased to work less than 6 month earlier.

    To prepare for a longevital society we need to make certain advance plans, and be careful in our investments. It makes more sense to invest in energetic efficiency and a large development of renewable energy sources than to “drill, baby, drill” as price volatility, political risks, climatic disruption linked to all fossil fuels are almost certain to cause financial and ecological cataclysm. We need to acknowledge the fact that peak-oil per human being is past, probably no later than 1980 according to Jeremy Rifkin, and Amory Lovins.

    But to prepare for a longevital society means we need a transparent financial system; I don’t want to put my retirement’s money on the stock market as it seems similar to putting in in the hands of a casino run by Cosa Nostra types.

  7. It is because of the legacy of elders that humanity has reached the present level of progress. Per Kurowski’s first argument that strong family values that deliver support to their elderly members is much more humanistic and convincing than his proclivity that longevity blocks the job oportunities of the youth.

    What is actually needed is new ideas to generate wealth by exploiting the untapped resources of this universe, including those lying out in space and under the seas. Global unified efforts for this purpose are needed.

    Longevity risk seems to be more assumed than it actually exists. Vastness of Nature confirms that much more needs to be explored, such as for example oil and gas reserves lying around and under Atlantic.

    However, unraveling of the impending situation before it actually becomes unmanageable is quite commendable and needs input by other thinkers as well.

    • Unfortunately running parallel to the longevity problem we are facing the challenge of a structural and permanent unemployment for millions of young people. We should of course try to solve both problems before they prey on each other… lets pray we are able to do so. http://bit.ly/Hrba4g

  8. Governments need to plan for the future of their people. Taxing the majority and raising the cost of living will leave people with a lot less money to retire on and most won’t have any to retire on and so they will rely on the pension system. If governments tax their wealthy and business elites fairly, then massive revenues will be flowing into savings for the retiring population.

  9. The first thing to realize is that whatever the fundamental structural problem that hits you tomorrow, like the issue of longevity, you will be in better shape to confront it if the general economy is healthy and therefore, just as an example, we must urgently expel those silly bank regulations which, in the name of the stability of banks, discriminate against small businesses and entrepreneurs, just because these are perceived as risky.

    Then it is also important to not make it solely a dollar and cents centered debate, as this document seemingly does, but also to look at how many of the services for the longer-living-elderly could be provided better and more efficiently, so that it does not require as much financial resources. Clearly a society with strong family values that delivers support to their elderly family members, needs less financial resources than societies which outsources all that to independent service providers.

    The adaptive mechanisms of humanity are always in action and, who knows, for instance, if the current trend of more youngsters living with their parents and grandparents is not part of a solution to the longevity problem, among others, because that same longevity has made parents and grandparents block the job opportunities of many of the young.

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