Spend enough time around retirement experts, and the prospect of living longer starts sounding more like a threat than an opportunity.
After all, increasing longevity is helping to bankrupt pension plans, erode Social Security's finances and make it so hard for individuals to choose a path toward a well-funded retirement that they may as well be playing pin the tail on the donkey.
Yet a long life can be a tremendous blessing. On July 4, my grandfather died after 90 action-packed years. He lived 14 years longer than the current U.S. male life expectancy and 34 years longer than the average man was living the year he was born. He used those years well. After teaching and coaching into his late sixties, he spent retirement volunteering, organizing dinner outings and golfing as if it was his job. Pensions and Social Security checks more than covered greens fees and early bird specials.
Contrast that with the retirement his two-year-old great-grandson might expect. Children born these days have a pretty good chance of living into the hundreds, according to some demographers. If my nephew outlives his peers as his great-grandfather did, he’ll pass 110, and he'll probably do so without the pensions and social safety net his great-grandfather enjoyed.
- Special Report: The Future of Retirement
If such projections are anywhere near correct, pity my nephew's future financial adviser. Saving enough over a 40-year career to finance a hypothetical 50-year retirement may well be an unsolvable math problem. And it's not just the young who will confront scary arithmetic. The triple threat of longer life expectancy, low savings rates and high government debts put at risk the traditional social contract many baby boomers grew up on -- the one by which, after working hard over 45 years or so, you could relax a little late in life.
The good news: Creative attempts at solving the retirement challenges of aging populations are cropping up around the world, giving hope that through the combined efforts of employees, employers and the government, retirees can still salvage the promise of the golden years. Even now, there is plenty of room to improve how we save, invest and tap into Social Security benefits to protect against pain and poverty. (Read "Longevity-Proof Your Future.")
First, about those long lives: Researchers in Europe combed birth and death records stretching back to the 1840s for countries with the longest life expectancies. Plotted on a graph, these averages tell an impressive story. For about 170 years, life expectancy has been rising at the more or less consistent rate of 2.5 years per decade. That works out to three extra months for every year lived, and six hours for every day.
Progress could speed up or slow down, but the trend is clear, says James W. Vaupel, an American who heads the Max Planck Institute for Demographic Research in Germany. Continued gains in life expectancy would not only benefit children of the 21st century. The average 65 year old, now facing a life expectancy of 19 more years, could get five or more “extra” years. A health-conscious 45-year old might expect 10 more years than her parents will get.
Vaupel and his demographic colleagues have fierce critics. Surely, they argue, it won't be as easy to push life expectancy from age 77 to above 100 in the 21st century as it was to go from 47 to 77 in the 20th. Maybe many of the easy medical advances have been achieved. Maybe the human body has a natural limit. Maybe obesity will sabotage health gains.
Many of the actuaries who draw up life-expectancy estimates for governments, pensions and insurance companies are among Vaupel's critics. The Social Security Administration projects longevity gains in the U.S. of about one year per decade, far slower than Vaupel's estimates. That brings U.S. life expectancy for men from about 76 today to 83 by 2100, and from 81 to 86.4 for women. Japanese women can expect to live nearly that long today.
At least for the actuarial industry, then, life is short. Yet what makes Vaupel and his colleagues increasingly confident is that there are no signs that global life expectancy gains are slowing.
A new retirement reality means rethinking how we view portfolio risk. Playing it too conservative as we near and enter retirement becomes even more dangerous when we're talking about 40 or 50 years of inflation nibbling at assets, rather than 20.
After the advice to not flee equities too soon, one of the more facile, albeit powerful, solutions suggested to remedy potential retirement shortfalls is to save more. Saving more in an era of stagnant wages is difficult, to say the least. That’s why in some countries a higher level of employee savings is becoming mandatory -- with the contributions coming from employers.
Laurence Fink, chairman and chief executive officer of BlackRock, the world’s largest asset manager, says the U.S. should follow the lead of Australia, which forces employers to contribute 9.25 percent of every paycheck to retirement funds. That proportion will rises to a minimum of 12 percent by 2020. The United Kingdom began a similar scheme last October that will eventually require pensions be funded by a combined 8 percent of pay coming from employers, employees and the government. (To see how other countries cope with retirement challenges, see the "Where People Live the Longest" slideshow.)
The U.S. Treasury's top retirement policymaker, J. Mark Iwry, also wants workers saving double-digit amounts of their income -- but has proposed "automatic" retirement accounts from which people can opt out . One thing the U.S. is doing is making it easier to turn savings in defined contribution 401(k) retirement plans into more defined benefit plan-like lifetime income streams such as annuities or longevity insurance. Longevity insurance pays out if the policyholder reaches an advanced age such as 80 or 85.
Still, all those changes are voluntary and don't require employer contributions. If Americans can't save more, they might simply need to work longer (a prospect, granted, that is hardly simple). Some countries are increasing the prospect that this will be necessary by raising the retirement age. Denmark was hailed as a model by retirement experts when, in 2006, it decided to automatically adjust its retirement age, now 65, to rises in life expectancy. It will do that starting in 2027, after the retirement age is raised to 67.
Supporting the “work longer” camp are studies suggesting that staying active later in life is a good way to stay healthy and fend off dementia. Vaupel has suggested people might work later in life in exchange for more free time in earlier years.
This may sound unrealistic, to say the least. But it makes sense that, with lives that last a century, not all the free time should come at the end. In a perfect world, parents might find it easier to take time off for child-rearing; going back to graduate school in your forties or later wouldn't seem so financially risky. "The 20th century was a century of redistribution of income," Vaupel has written. "The 21st century may be a century of redistribution of work." He thinks policies that encourage part-time work could be a good start.
The big barrier to such a rearrangement of life is employer attitudes about older workers. It’s not as if U.S. tech companies are out aggressively recruiting sixty-something software engineers. In the U.S., 25 percent of women aged 60 or over are in the labor force; for men, it's 35 percent. (To see country rankings on retirement readiness, view the "Global Retirement Dilemma" graphic.)
Without enough savings or ways to earn much money later in life, many of the oldest Americans could be left with modest Social Security checks as the only reliable, inflation-adjusted source of income. This makes the program's survival more essential at a time when rising costs have prompted attempts to scale back the benefits provided by Social Security. "As a practical matter, it's very, very likely that it's going to be there, unless society really falls apart," says Anna Rappaport, a fellow at the Society of Actuaries. "The question is how much will benefit levels be cut?"
The Health Gap
If working longer isn’t a realistic option, there’s the film noir retirement "solution." This involves feeling free to abandon healthy habits like regular exercise while adopting habits certain to shorten your life, like overeating and smoking.
There's a certain dark logic to this line of thinking: Why try to live a long life if it's likely to end in poverty? Many people are inadvertently following this strategy: In the U.S., well-educated and wealthier Americans are increasingly much healthier than their poorer and less-educated peers.
Adults with less than 12 years of schooling have life expectancies not much better than those of all adults in the 1950s and 1960s, according to a 2012 study led by S. Jay Olshansky of the University of Illinois at Chicago. That “pernicious and systemic” inequality is one reason Olshansky and others argue the 21st century might not be as healthy and full of centenarians as Vaupel and his colleagues project.
If longer life is a financial threat, it is one that we can spot creeping toward us from decades away. The chances of extreme longevity are far smaller for current retirees and older workers than for their grandchildren. For younger workers, there's time to save more, to reimagine lives that include later-life careers and to create better financial products to help ensure that income lasts a lifetime. And there's time for employers and governments to work together on creative solutions.
For all of us, then, the prospect of living longer than our parents and grandparents can be seen not as a potential menace but as an opportunity to earn and save enough to devote time to things we enjoy most -- whether that's the dinner outings with friends and golf that my grandfather treasured, or something in the unformed dreams of his two-year-old great-grandson.