Retirement, Savings, Life Expectancy…The Numbers Don't Add Up

The Society of Actuaries should have bumper stickers.

They could say things like, “I’ve Got Your Number,” or “Who’s Counting?” or some other pithy remark. The point is, I don’t think that actuaries — and their affinity group — get much respect, and yet they should.

Not because everyone wants to join this club, but because the organization wields such power, even though most people have never heard of them.

Actuaries are the people that calculate the probability of something happening, particularly analyzing risk-related events like hurricanes and floods. Some of their most notable work is figuring out how long people will live on average, which is very useful for insurance companies and other firms that key off of people’s longevity.

While most people can’t exactly describe what an actuary does, the Society of Actuaries just told most Americans something very personal about themselves — when it comes to retirement, they’re even worse off than they thought. And there’s one reason for that…

We’re living longer.

The Society just released its latest estimates of longevity, the first revision since 2000. A 65-year-old man is expected to reach 86.6 years of age, up 2.0 years from the estimate in 2000, while a 65-year-old woman’s life expectancy has been increased by 2.4 years.

That sounds really good until you realize we all have to pay for it!

The news is hitting home for companies that offer pensions because they’re legally required to use the Society’s life expectancy tables in calculating their pension obligations. Adding a couple of years onto every future retiree’s stream of payments means that a lot more money will go out the door.

Take the case of General Motors… the life expectancy change added $2 billion in pension liabilities. The consulting firm Towers Watson estimates that the change could cost the pension plans of the 400 largest U.S. companies roughly $72 billion. That’s a lot of cash.

But, according to analysts, the story isn’t all that bad.

Luckily, private pensions have been winding down.  Just 16% of private-sector employees participated in defined benefit pension programs, with 15.7 million active members. That’s 48% less than the number of people covered by such plans in 1980.

So, luckily, a bunch of private companies won’t be footing the bill for longer payments to as many people as they would have in the past.

But here’s the catch — those people still exist. Not the same ones from the 1980s, but private-sector employees in general. If they aren’t covered by private pension funds from their employers, then here’s the question: who is responsible for their retirement?

They are.

This is where the message from the Society of Actuaries to the average American comes into play. The typical American at 65 is not covered by a pension, but is still expected to live a couple of years longer than he was in 2000. The retirement funding for this person comes partly from Social Security (with its own problems) and partly from his own savings.


The Federal Reserve released the results of its 2013 Survey of Consumer Finances (SCF) last year. According to that study, only 56.5% of 45- to 54-year-olds had a retirement account, a sizeable drop from the 65.4% of people in the same age range who had retirement accounts in 2007. Those who actually had a retirement account in 2013 had just $87,000 in it.

This is the median, so 50% of the people had more than this, while 50% had less.

The average American has fewer retirement benefits, little in savings and will live longer.

Of course, there is that other type of employee, the one that works for a governrnment entity. According to the latest release from the Census Bureau, there are 3,992 pension plans for states and local entities, covering 14,222,906 people. These plans had total assets of $2,715 billion and obligations of $3,615 billion, leaving them underfunded by roughly $900 billion.

Keep in mind that these are 2013 figures and will change with the new actuarial report. Increasing the life expectancy of the membership will result in immediate higher obligations with no change in assets, making the plans even more underfunded.

But the people covered by the public pensions don’t have to worry too much, their benefits are covered by states, cities, and other entities that have to come up with the money to make good on their promises.

To get the money, they’ll have to raise taxes, which means mostly going back to the same people that are no longer covered by private pensions and have too little saved for their own retirement.

Yep.  We’re toast.

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Rodney Johnson

Rodney’s investment focus tends to be geared towards trends that have great disruptive potential but are only beginning to catch on to main-stream adapters. Trends that are likely to experience tipping points in the next 5 years. His work with Harry Dent – studying how people spend their money as they go through predictable stages of life and how that spending drives our economy – helps he and his subscribers to invest successfully in any market.