Few people would argue that greater global longevity is a bad thing, especially given the fact that older people living in developed nations today enjoy a better quality of life than could have been expected by previous generations.
Still, an aging global population presents some clear economic challenges. A 2018 Natixis report on the aging global workforce points to Japan as a bellwether for what other developed economies can expect. In that country, 27% of people are currently over the age of 65, and by 2050, there will be 70 retirees in Japan per 100 workers.
Ed Farrington, head of retirement at Natixis, says the world can and should celebrate the fact that medical advances and broad-based lifestyle changes are allowing more people to reach older ages and remain healthy. But when it comes to the tricky topic of retirement planning in an aging world, he says, greater longevity is a serious issue to confront.
“It can quickly become very difficult for unprepared countries to support the growing portion of their populations living in retirement,” Farrington explains. “We are talking about retirement systems that were built on the expectation of having somewhere between 15 and 20 people living in retirement for every 100 workers. Seventy retirees per 100 workers simply becomes unsustainable.”
Data from J.P. Morgan’s latest Guide to Retirement shows the U.S. workforce is on a path much like Japan’s. The analysis shows that, for a healthy couple retiring today at age 65, the probability of at least one of the two living to age 75 is 97%. The figure drops only to 90% when the age rises to 80 years, and to 50% for 90 years.
Farrington and others note that, aside from the challenge greater longevity poses to individuals’ savings, this also poses a threat to nationwide systems, including Social Security and Medicare. As a result, employers, governments and individuals must make adjustments now to assure these systems can remain in place and fulfill their promises.
“Are we prepared to have larger portions of our population no longer working, and therefore living off essentially the bulk of either what they saved, or off of the generations that will come after them?” Farrington asks.
Katherine Roy, chief retirement strategist at J.P. Morgan, emphasizes the fact that Social Security and government benefits like Medicare were always intended as supplemental. Such programs go a long way to helping a lot of people, but individuals must understand that these programs will not provide sufficient income or insurance coverage alone. Sri Reddy, senior vice president for retirement and income solutions at Principal, agrees with that assessment. He adds that Social Security will be around once Millennials reach retirement, but policy adjustments must be enacted for the system to remain viable over the long-term.
“Social Security is a foundation, but there needs to be small fixes to keep the system healthy,” Reddy says. “Changes could include increasing the retirement age to 70 years old, or making a greater portion of Social Security income taxable.”
For their part, says Reddy, employers can make changes today to help older individuals continue working longer. This could mean allowing for phased retirements, or providing programs to help older workers keep their skillsets current.
Plan design solutions
The experts agree that employers can take immediate steps in their retirement programs to address the challenge of greater longevity. Counterintuitively, they say, some of the most powerful steps to take today actually involve the youngest workers. For example, automatically defaulting new workers into a high savings rate and embracing automatic deferral escalations and reenrollments will position people for a stable retirement.
“Implementing these automatic features is one of the first and best solutions for employers,” Farrington says. “Auto-enrollment and auto-escalation can help a lot, along with a well-designed defined contribution plan put together with strong incentives and communication. If we can get workers early in their career to save 10% of their income or more, we will end up in a much better place.”
According to Aron Szapiro, director of policy research at Morningstar, employers should make it easier for workers to make systematic withdrawals from defined contribution plans, rather than only permitting retiring workers to make a lump-sum withdrawal.
“Having a system where you have people take out lump sums is not a good idea,” he says. “Any policy development that could encourage structured withdrawals and promote longevity insurance could be really valuable.”
Roy and Farrington also point to the importance of shorter-term financial stability as a keystone to successful retirement planning. Individuals must have sufficient emergency savings, for example, before retirement can become a realistic priority.
“You have to have a little wiggle room and be able to handle situations that change in the U.S. economy, and also in your personal situation,” Roy explains. “Emergency savings is one way we are trying to engage younger individuals. From here, we can figure out the level of savings they’ll need to have to achieve a successful retirement.”
Farrington concludes that employers, employees and policymakers all have a role to play in this discussion.