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Increasing Longevity Threatens Retirement Funding

Sigma Investment Counselors

March 4, 2015

The Society of Actuaries has revised its mortality assumptions for the first time since 2000.  The new data estimates that the average 65-year old man today will live 86.6 years, up from the 2000 estimate of 84.6 years.  The same data for women has increased to 88.8 years from 86.4 years.

These changes have significant implications for investors and tax payers.

For defined benefit pension funds, the math is relatively straight forward.  Longer lives lead to more pension payments by employers, and thus higher costs, which may impact income statements and will have to be reflected on corporate balance sheets.

Defined contribution plans will not be directly affected.  However, participants will be faced with increased lifetime retirement costs, which could be financed through negotiated improvements in defined contributions, increased savings and/or increased government benefits.

Tax payers should note that Social Security is, to a considerable degree, similar to a corporate defined benefit plan.  Increased longevity may require increased payments into the Social Security system or reduced benefits.

Increased longevity is also likely to increase retiree health care costs for corporations, reducing earnings, and further stretching government programs, potentially increasing taxes.

Investors should understand that increased longevity is likely to require some revisions in formulating portfolio strategies and savings rates.  Simply stated, the longer you live, the more money you will need to support your retirement requirements.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®

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