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Retirement

Pension

Americans Are Living Longer Than Ever. And That May Kill Your Pension

For the first time, both boys and girls born today can expect to see at least 90 years of age, according to revised mortality tables published on Monday by the Society of Actuaries. This represents a staggering extension of life over the past century. In 1900, newborns could not expect to see what is now the relatively youthful age of 50. But a big question looms: how we will pay for all these years?

In the last 100 years, the drumbeat of extended life expectancies has been interrupted during World War I and again during the Great Depression, but only fleetingly in any other period. Medical science and greater attention to health and nutrition have stretched lifetimes by a year or more every decade. In the new tables, newborn boys are expected to reach exactly 90 years of age—up from 87 in the last published tables in 2000. Girls are now expected to reach 92.8—up from 87.3.

This extraordinary expansion has changed every phase of human life. Only a few generations ago childhood came to an abrupt halt at ages 13 or 14, when boys went to work and girls married and started families. As lifetimes expanded, the teen years emerged and kids were kids longer. They went to high school and then to college. Today, the years of dependence have stretched even longer to 28 or 30 in a period recently defined as emerging adulthood.

Middle age and old age have also stretched out. Half a century ago reaching age 65 meant automatic retirement and imminent infirmity. Today, millions of 65-year-olds aren’t just in the workforce—they are reinventing themselves and looking for new pursuits, knowing they have many good years ahead.

According to the revised tables, which measure the longevity of those who hold pensions or buy annuities, a man at 65 can expect to live to 86.6—up from 84.6 in 2000. A woman at 65 can expect to live to 88.8—up from 86.4 in 2000. (These stats were further revised in October 2015 to 88.2 and 86.2 for women and men, respectively) In another 15 years the typical 65-year-old will be expected to reach 90. And these are not necessarily years of old age; for many, most of these extra years will be lived in relatively good health.

What is good news for humanity, though, sends tremors through the pension world. Every few extra years of life expectancy come with a price tag. Already, many private and public pension funds are woefully underfunded—and the new tables essentially mean they are even further behind. Aon Hewitt, a benefits consultant, estimates that the new figures add about 7 percentage points to the amount a typical corporate pension must set aside.

So a typical pension that has only 85% of the funds it needs based on the old mortality rates now has only 78% of what it needs based on the new rates. This will almost certainly lead to a further erosion of individuals’ financial safety nets as pension managers try to figure out how to fill the holes. Already the majority of large companies have frozen or changed their pension plans in order to reduce their financial risk, while shifting workers to 401(k)s. Look for more employers to abolish their traditional pensions and to offer workers a lump sum settlement rather than remain on the hook for unknown years of providing guaranteed income.

“As individuals receive lump sum offers, they need to understand that their life expectancy is now longer,” says Rick Jones, senior partner at Aon Hewitt. “They need to be able to make the money last.”

Companies probably will have until 2017 before regulators require them to account for the new mortality rates, Jones says. That means, all things being equal, lump sum payments will be higher in a few years. For those on the verge of taking their benefits, it might make sense to wait. Public pensions, which generally are in worse shape than private pensions, will have to account for longer lives as well, though they are not subject to the same regulations and the adjustments will come slower.

The new figures also promise to speed changes in the 401(k) world, where both plan sponsors and plan participants have been slow to embrace annuities, which are insurance products that turn savings into guaranteed lifetime income. Savers have generally avoided certain annuities because they are seen as expensive and leave nothing for heirs. Lacking demand and facing legal hurdles, employers have also shied away.

Yet policymakers and academics have been arguing for a decade that 401(k) plans need to provide a guaranteed income option. The U.S. Treasury has been pushing the use of longevity annuities in 401(k)s, recently issuing guidelines for their use in target-date retirement funds. With a longevity annuity, also known as a deferred income annuity, you can buy lifetime guaranteed payout for a relatively small amount and have it kick in at a future date—say, age 80 or 85. And these days, even that’s not all that old.