What if we live longer?

by on April 12, 2012 at 1:33 pm in Data Source, Medicine | Permalink

From Timothy Taylor:

The IMF asks what would happen if life expectancy by 2050 turns out to be three years longer than current projected in government and private retirement plans: “[I]f individuals live three years longer than expected–in line with underestimations in the past–the already large costs of aging could increase by another 50 percent, representing an additional cost of 50 percent of 2010 GDP in advanced economies and 25 percent of 2010 GDP in emerging economies. … [F]or private pension plans in the United States, such an increase in longevity could add 9 percent to their pension liabilities.  Because the stock of pension liabilities is large, corporate pension sponsors would need to make many multiples of typical annual pension contributions to match these extra liabilities.”

This is one reason (of several) why “doing fine against the baseline” does not much impress me as a fiscal standard.  I hope to cover that broader topic soon.

Nate April 12, 2012 at 1:51 pm

Does life expectancy correlate with good things happening economically? If so, then a 3 year surprise bump in LE would likely come with a unexpected bump in productivity/earnings/gdp too, right? It feels like we might be hedged on this…

Nathan W April 13, 2012 at 4:23 am

I think it’s typically shown to be the case, but if it’s purely from medical advances rather than economy-wide benefits creating better public and personal health, I think the hedging instrument becomes fairly dull.

Hope you’re right though :)

Bill April 12, 2012 at 1:52 pm

Surprising that when governments want to cut benefits so that they do not want to raise taxes, or when others want to cut benefits so they can give tax increases, you find that governments, but NOT PRIVATE insurance companies, advocate changing the tables.

What does this tell you?

Andrew' April 12, 2012 at 2:15 pm

A government that does not want to raise taxes?

Bill April 12, 2012 at 2:31 pm

You can raise taxes by cutting benefits, claiming that the benefit is too rich. Then, with the extra cash, you can cut taxes.

Ask yourself this question: Why aren’t life insurance companies changing mortality tables if the projections are incorrect. Or, ask yourself this question: should you be selling or shorting life insurance companies that issue annuities… If the answer is no, then ask: what is someone trying to sell you: what they are trying to sell you is a story that justifies whatever they want: a cut in benefits (based on projections insurance companies don’t use) or a raise of taxes.

Ask yourself the question: why does private insurance have it wrong. Don’t they have the incentive to have decent mortality tables.

Cliff April 12, 2012 at 2:36 pm

It’s a Bayesian world. They don’t have to “have it wrong” to be wrong in the end. The worst thing that can happen to them is bankruptcy.

TallDave April 12, 2012 at 2:48 pm

You seem a bit confused on how actuarial tables work — they change constantly. And private insurance companies use them, because they need to know how to price policies competitively but profitably.

http://en.wikipedia.org/wiki/Life_table

The problem is that governments don’t use them, because governments just seize their revenue rather than providing insurance in a competitive market.

Bill April 12, 2012 at 3:28 pm

TallDave,

The confusion is on your part. I have represented insurace companies on how they can exchange historical data to compute such tables and other data within the McCarran Ferguson exemption. Mortality tables do not change by three years, much less three months.

Second, your spurious and unsupported claim that the SSA does not use mortality tables, or that the trustees do not, is also false. Here is the SSA’s methodology for the yearly computation: http://www.ssa.gov/oact/NOTES/as120/LifeTables_Body.html

TallDave April 13, 2012 at 5:51 pm

Again, you seem very confused on this. I can’t even tell what you’re arguing — are you saying you think life expectancy hasn’t changed by three months over the decades, or that actuarial tables don’t reflect this, or that insurance companies just ignore actuarial changes? None of these make any sense.

Second, no the SS retirement age is absolutely not tied to the actuarial tables — that’s why we’ve gone from 10:1 worker/retiree ratios to 3:2. They may do cost estimates based on them, but they’re basically irrelevant to any actual decision making.

TallDave April 13, 2012 at 5:54 pm

(unlike, of course, insurance companies, which have to respect reality and can’t just seize more revenue by threat of force)

TallDave April 13, 2012 at 6:05 pm

… which is why the author makes this point:

One step could be to build into the benefit formal for public pensions, like Social Security, provisions for an automatic decline in expected benefit levels for future retirees as life expectancy rises.

Obviously if the gov’t were already using actuarial tables to determine benefits, he wouldn’t have suggested that they consider it as an option. As it stands now, the only way that can happen is by act of Congress — which should have been done from the beginning.

Dan Weber April 12, 2012 at 5:17 pm

Insurance companies are held by contract to prior promises. They also want to avoid losing new customers to competitors, and the customers care about reputation of prior promises.

Social Security is unambiguously not a contract. Your SS benefits can change whenever a Congress decides to change them.

Bill April 12, 2012 at 5:31 pm

Dan, True, SS is not a contract, but a promise, and can be changed.

But, that doesn’t mean that you should be allowed to make longevity claims that are not supported by evidence (ie, 3 year claim), or methodology or data not followed by private carriers, as an attempt to wiggle out of promises or create a smokescreen.

The point is that the article should explain why the IMF could have it right and that actuaries and private carriers would have it wrong.

Methinks this is just another way to either raise taxes or cut benefits so taxes could be lowered to someone else.

JWatts April 12, 2012 at 5:59 pm

“Methinks this is just another way to either raise taxes or cut benefits so taxes could be lowered to someone else.”

Well it’s not like this fact could be hidden. Either people start living longer than the expected age or they don’t. The 3 year divergence won’t happen overnight, so there is no reason SS can’t raise the retirement age another 3 years. The retirement age has already been raised to 67 and will need to go up to 70 to deal with the funding crunch in the next 15 years. So it will probably have to be raised to 73 or so in the 2030-2040 time frame.

Personally, I’m hopeful life expectancy coupled with high functionality goes up drastically. I’ll trade an extra year of working for an extra year of life at anytime. Indeed, I’d probably go two to one ;)

Bill April 12, 2012 at 6:30 pm

JW, I think the story was that that the divergence required action now, not in the 2030 timeframe. I agree though, we can wait.

I would note a little item that tips in the other direction: the mortality tables assume that everyone is covered: but SS collects from but does not cover all the mortals that paid into it: illegal aliens (and their employers) have been contributing, and won’t be withdrawing.

Perhaps this will offset the 2030-40 speculation.

You could also make another story from this: those who are likely to live longer are the wealthier members of the pool–so therefore we should raise the SS cap, because the wealthy will draw more from the pool as they will be the ones living longer.

Bet no one saw that coming.

TallDave April 13, 2012 at 6:41 pm

so there is no reason SS can’t raise the retirement age another 3 years

The AARP is one big reason why they can’t, and the Democratic party is another.

What you describe is just common sense and should have been happening all along, but actual legislation in that direction has been feeble and sparse. Instead of a savings program that pays for itself, SS became the promise that you get an ever-longer taxpayer-funded retirement, actuarial reality be damned. And gov’t being gov’t, they also spent the surplus.

JWatts April 13, 2012 at 8:04 pm

“so there is no reason SS can’t raise the retirement age another 3 years”

“The AARP is one big reason why they can’t, and the Democratic party is another.”

Yes, that’s an excellent point. Throwing Grandma off the cliff commercials, etc.

bleh April 12, 2012 at 2:46 pm

I read the link, and it’s a little annoying that the evidence that “government consistently underestimates life expectancy” is life expectancy at birth, which is basically irrelevant to pensions, as it has been dominated by infant mortality.

For the table showing the more relevant life expectancy at 65, 5 countries’ pension funds underestimated life expectancy and 3 countries’ pensions overestimated it. The data is consistent with a 1.5 year /20 year period underestimate, but it’s much less straightforward and consistent than was argued by the plain life expectancy data.

It is interesting to consider the potential effects of unexpected longevity increase on pensions. But, as others pointed out, it’s hard to say what other benefits might accompany an unexpectedly large increase in population health. The solvency of pensions is equally dependent on the strength of their investments.

Regarding insurance companies, they probably aren’t screaming about government mortality tables, because they employ their own actuaries and are free to use their own tables. Life insurance companies’ annuity longevity costs are also innately hedged against unexpected increases, due to their life insurance policies. They are also free to employ explicit longevity hedging instruments, reinsurance, etc. Pension managers are possibly less savvy, and may be subject to using public tables by political or contractual constraints.

Regardless, it seems USA is steadily moving away from employers providing defined benefit plans.

JonF311 April 12, 2012 at 7:14 pm

An increase in life expectancy does not necessarily mean people living longer after retirement. Most of the increase in life expectancy numbers we’ve seen in the last 150 years have come about because fewer people die young. If those extra three years occur for the same reason (lower infant mortality, fewer deaths among the young from accidents and violence; fewer deaths in middle age from cancer etc.) then retirement projections are either not impacted, or, are positively impacted due to more younger people paying into the system rather than shuffling off into an early grave.
It’s entirely possible that we will see some great breathroughs in longevity technology, but I would not stay up late worrying or hoping over that. There’s no reason to think we will be adding much time to the end of people’s life, though we may help more people reach a ripe old age.

Thanatos Savehn April 13, 2012 at 12:54 am

One word: rapamycin. If it works in humans the way it has worked in say mice then it’ll do exactly that – add years to mid- and late-life. Imagine a drug that keeps you biologically 50 until you’re 70 whereafter the usual decline begins. That’s the nightmare scenario for pension plans.

dan1111 April 13, 2012 at 7:00 am

But as long as you’re biologically 50, you can keep on working, right?

I suppose it might be a short-term nightmare if such a drug appears too quickly, as it could blow up existing pension plans. However, long-term it would reduce the commitment needed for pensions, since people would be able to work for a greater percentage of their total lives.

Dent April 13, 2012 at 9:13 am

And that is a good thing… why? It just means we’ll have more people suffering through the unpleasantness of more work years.

JWatts April 13, 2012 at 3:03 pm

“And that is a good thing… why? It just means we’ll have more people suffering through the unpleasantness of more work years.”

The choice is between dieing or working longer. You can always choose option A if B really bothers you.

mpowell April 13, 2012 at 4:35 pm

Anyone in the United States who would not be willing to work an extra year in order to live another year needs to think really hard about their life and priorities. Get a new job that you enjoy more and pays you less and find ways to get by on the reduced income.

TallDave April 13, 2012 at 6:06 pm

“the unpleasantness of more work years”

It’s a natural attitude, and common enough to explain our looming entitlement crisis.

Dent April 13, 2012 at 9:03 pm

“The choice is between dieing or working longer. You can always choose option A if B really bothers you.”

Then maybe we should have functioning voluntary euthanasia options for everyone? To my knowledge, the best suicide drugs are currently restricted.

Dredd April 12, 2012 at 8:17 pm

Perhaps, instead, some of us could become altruistic and die for the good of the many. It is one of the oldest forms of problem solving. In some cases it is also inevitable.

The Original Frank April 12, 2012 at 8:47 pm

Social Security was never intended as an end-of-life vacation. When Bismarck introduced mandatory retirement benefits to commence at age 65, male life expectancy in Germany was still under 60. It hadn’t got to 65 in the US by the time of Franklin Roosevelt. What was popular about US Social Security at inception was the disability benefits. It was all intended as insurance against not being able to work.

Mandatorily financed retirement benefits should commence sometime well above life expectancy. Private retirement benefits can commence whenever the contracting parties agree.

Willitts April 12, 2012 at 9:33 pm

The disability program wasn’t added until 1956.

Willitts April 12, 2012 at 9:44 pm

I’m not sure I agree with government insurance for superannuation either. That’s what annuities are for. The main problem is that annuities get a bad reputation because of cross-selling and outrageous terms that most people aren’t sophisticated enough to figure out are raw deals. Hell, government regulation of annuities would be preferable to government control.

We already have too many incentives to not save. There’s no reason to add more. Government mandated savings in approved private pension funds would be preferable to what we have now. But an individual mandate isn’t within the federal government’s specified powers. What we have now is a sham tax and spend program with some theoretical link between FICA taxes and OASDI benefits. The Supreme Court should have smelled that rats a mile away.

You have no right to social security benefits, and government likes it that way.

bleh April 13, 2012 at 1:19 pm

Annuities are already heavily regulated, obviously they could be more regulated or existing regulations more enforced, but plenty of laws certainly exist. It’s not clear that 1 more law or less would change their appeal very much.

For better or worse, government is involved in providing a lot of insurance in different areas, not just longevity. Yes, the government can rewrite your benefit at a future date… However, private insurers can go bankrupt, and as you mentioned, private insurers can benefit by tricky terms and conditions.

Our government provides SSI because the public wants it to. Whether you or I or anyone does or doesn’t agree with the accounting, doesn’t change the basic motivations for providing this insurance.

bleh April 13, 2012 at 3:37 pm

Sorry, just noticed this “never meant to function as retirement” + life expectancy post — Life expectancy at birth is a misleading statistic that distorts the entire discussion.

See the following chart of life expectancy at age 50 — as far back as it goes, 1850, the expectancy still is age 70. It increased about 10 years through the 20th century, but those that made it through middle age were likely to collect 65+ retirement benefits.

http://mtmg.files.wordpress.com/2009/06/msp4981969340abi5654g3000063b8bgh973ia2i78.gif?w=500

See also the SSA page on the same criticism.
http://www.ssa.gov/history/lifeexpect.html

john malpas April 12, 2012 at 9:04 pm

It might help if you let those who are old and want to work actually work.
To often it is still ‘too old at fourty’. And youf must be served.
So many jobs do not need muscles ( or wit) these days. .
Saving money for old age is a bit pointless when enduring inflation and recession is almost inevitable if you live over 70.

JWatts April 13, 2012 at 3:08 pm

“Saving money for old age is a bit pointless when enduring inflation and recession is almost inevitable if you live over 70.”

Inflation and recession can easily be factored into your savings. Indeed, a broad stock fund earning the long term historical average of 7% – 3% (long term inflation rate) means you should be able to draw off 4% in perpetuity.

And yes, I realize you might not live as ‘nice’ on 4% as somebody who is drawing 7% per year. But if you into your 90′s (3 of my 4 grandparents) then you won’t regret planning ahead.

Thomas H April 12, 2012 at 10:17 pm

Not much if we have a beginning of pension age that is tied to life expectancy at that age. Of course employer attitudes have to change about older workers and the Fed will need to do a better job stabilizing NGDP. :)

MSG April 12, 2012 at 11:55 pm

They are laying the ground for death panels, though they dare not admit this yet.

TallDave April 13, 2012 at 6:09 pm

I don’t know, they seem pretty comfortable right now with the strategy of simultaneously claiming death panels are a paranoid right-wing invention and that death panels are a really awesome idea that will totally save us lots of money and stuff.

Brian_2 April 13, 2012 at 12:23 am

This is why we should be seriously focusing on treating aging itself, rather than just its symptoms.

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