Re-Envisioning Retirement

Re–Envisioning Retirement

The following article is based on a presentation that James MacGinnitie, past preseident of the SOA, gave at the Presidents Forum at the International Actuarial Association meetings in June 2005, with research and editorial support from Emily Kessler, SOA staff ffellow. The presentation has been adapted into an outline format. The Actuary would like to thank Jim for allowing us to flesh out the presentation and print it here.

In his presentation to the Presidents Forum in June 2005, James MacGinnitie was asked to talk about the future of retirement systems. He focused his discussion on how retirement may change in the 21st century. First, he discussed what forces are shaping current retirement trends and what might happen to redefine retirement in the 21st century. He then examined what this might mean for private pension systems, and how actuaries can adapt. The changes and challenges to the retirement system may be daunting, and actuaries must react creatively to meet them.

As we enter the 21st century, we, as a society, have misaligned expectations. The 20th century afforded the luxury of low work–force participation among the elderly. In particular:

  • Post–WWII baby boom children pushed their parents and grandparents out of the workforce. This gave the baby boomers jobs, and allowed their parents and grandparents the luxury of early retirement.
  • Developed countries had strong employer–sponsored pensions and state–sponsored pension plans with generous health care. In the United States, the development of Medicare in the 1960s gave all seniors access to basic health care coverage, which many employers were then able to supplement.
  • In developing countries, retirement programs were not yet a critical need. High birth rates, shorter life expectancies and more traditional family support mechanisms supported the relatively fewer elderly.

The growth in the 20th century, both economically and demographically, allowed us the luxury of generous, and long, retirement periods. To quote Robert Samuelson, "A growing nation is the greatest Ponzi game ever contrived."

The 21st century reality will be quite different. First, the 21st century economy will be much more global than previously experienced. Second, the 21st century will be the century of the graying population. And finally, particularly in the United States, we'll have to come to terms with rapidly increasing medical costs.

In the short term, this has translated into a transfer of risk to individuals. In the long–term, though, how will actuaries help individuals and society manage these risks?

The 21st century global economy will be characterized by industries that come and go quickly. Witness what has happened in a mere 200 years since the start of the industrial revolution:

  • The cradle of the industrial revolution (United States and Europe) houses a decreasing manufacturing industry.
  • The service economy, which created much economic growth for the developed economies in the 20th century, is now with technology, also unconstrained by borders. We see this particularly in the rise of outsourcing.

As a result:

  • Capital is unrestrained by national borders. As the means of production, and service, are no longer constrained by national borders, the capital to fund those enterprises is also unconstrained.
  • Investment returns have become more volatile and elusive. Competition comes from all sources, and all corners of the globe, not just your neighbors. Your big idea may produce success, for a time, but someone in another company or country will see it, copy it, improve it and do it for half the cost.

An educated workforce no longer needs to emigrate for economic opportunities: opportunities come to them. Not only can your competition produce it for half the cost, their workforce may be as well educated–or better educated–than yours. In the past, those well–educated citizens would leave home and family to migrate to the developed countries for economic opportunity; now they find that opportunity at their doorstep. In our 21st century global economy, the result is that any employer (or industry) may wax today, and wane tomorrow. Workers become, by necessity, mobile and temporary. Employers focus on short–term results, and short–term risks. In this environment, shareholders may be unwilling to bear long–term risks, particularly the financial risks of operating defined benefit pension plans.

The 21st century will also be the century of the graying population. In the midst of increasing economic risk, the retirement tsunami is coming. The retirement tsunami is characterized by its size: both in numbers and in length of retirement. A large number of workers, the post–WWII baby boomers, are retiring. Those workers will live longer in retirement. What turns this from a large wave to a tsunami is that fertility rates have fallen below replacement in every developed country, so the generation following this tsunami is much smaller than before. If "a growing nation is the greatest Ponzi game ever contrived" then what is a shrinking (or stable) but rapidly aging population?

The rapidly aging population is not just a U.S. and Canadian phenomenon, but happening worldwide. In the United States, birth rates have stayed relatively high (approximately 2.0 births per woman) versus those in other developed countries, including Canada, western and eastern Europe, and developed Asian countries (all around 1.3–1.7 births per women, plus or minus). As a result, the world will look very different by 2050:

  • By 2050, the elderly population is projected to increase from 15 percent to 27 percent of the population in the developed world and from 6 percent to 14 percent in the developing world.
  • By 2050, China's elderly population (330+ million) will be as great, in number, as the entire world's elderly population in 1990.

Both the changing economy and rapidly graying population put workers at risk. How might that risk be manifested?

  • Very few jobs, and very few employers, will last a working lifetime. Part of this is due to the global economy, but part of this also is due to a longer period that most people will be working. It's one thing to have a job last a lifetime when the working lifetime is 35 years. It's another when your working lifetime has to span 50 years.
  • Workers will need more periods of retraining as jobs, and sometimes entire industries, change required skill sets and quickly shift across borders. We saw this in the 20th century when manufacturing industries automated, computerized and moved overseas, but now that technology allows almost any job to be done any where, all workers will face the retraining crisis.
  • Finally, workers will be bearing these risks for longer periods. It's simple economics (and demographics): retirement is expensive, both personally and socially.

As an individual, it's easier to manage the financial risk of retirement if the retirement period is shorter, vis–à–vis the working period. A society with a lot of baby boom retirees, and fewer post–baby boom workers, needs to make sure those few workers stay in the workforce as long as possible. In combination, this makes for longer working lifetimes.

So workers will have more economic risk, will have to retrain more often, and will have to manage their multiple careers over a longer period of time. Where will they get help? Employers and government will continue to provide assistance, but not in the forms they've taken historically. In the past, the employer–sponsored defined benefit pensions helped workers manage their retirement risk by giving a pension that, together with Social Security (or other social insurance), provided for their basic needs. That pension was automatically managed to pay over the retiree's lifetime. But, in the 21st century economy, employers and shareholders may be unwilling and unable to bear the economic risk of traditional pension plans. In addition, with more retirees and fewer workers, governments will be unable to increase public income transfers.

So, what will the 21st century retirement look like? This is the challenge for actuaries. Given the demographic and economic forces, retirement systems must evolve. In particular, evolution in:

  • How employers support retirement
  • How governments support retirement
  • How individuals support themselves until death

One way to meet the challenge is to think of retirement not as an event, but as a process:

The main challenge is to establish systems in which retirement decisions have a benefit–contribution structure that provides incentives for individuals to make a rational choice to distribute their longer lifespan among retirement, leisure, economic participation and training. Too many pension schemes today are still based on the strict separation of education, work and retirement leisure. A modern economy ... [requires] a pension scheme that encourages rather than impedes the mixing of the three activities ...

Old–Age Income Support in the 21st Century: An International Perspective on Pension System and Reform

Robert Holzmann & Richard Hinz, The World Bank, 2005

So, the challenge to actuaries becomes, how to help individuals bear increased risks. In particular, how to design systems that help individuals deal with the risks of:

  • Longevity
  • Disability
  • Health care expenses
  • Long–term care
  • Skill obsolescence/job loss/retraining

The challenges will have to be faced using a number of traditional outlets, but not with traditional plans. Actuaries today must think about different systems:

The challenges will have to be faced using a number of traditional outlets, but not with traditional plans. Actuaries today must think about different systems:

  • How do we redesign public systems to withstand demographic waves?
    • How can governments support the mixing of work, retraining and retirement?
    • How do Social Security and other social insurance systems evolve?
    • Critically in the United States, how do Medicare and Medicaid, the long–term care system of choice for the middle class, evolve?
  • How do we redesign private systems to spread new economic risks employees face?
    • How can employers support, or help employees to support themselves, during periods of retraining? What about sabbaticals?
    • How can employers help employees turn retirement from an event into a process? We see the first glimpses of this today, in phased retirement. How is that institutionalized to make it work most efficiently for employers and employees? More importantly, how do we deal with different needs for different workers in different industries? Phased retirement won't be possible for those workers in physically demanding jobs. Will they still have "cliff" retirement?
    • How do employers support retirement? The defined contribution plan model isn't the answer: it's a great savings vehicle, and can help employees meet their retirement needs, but it simply doesn't protect against retirement risks. Yet the traditional defined benefit plan, which encourages early retirement, isn't the answer either.

We don't have any answers, yet. While the SOA has started to work on the issue, we need help from all of you. As a first step, the Pension Section Council sponsored a call for papers on Re–envisioning Work & Retirement in the 21st Century. Authors are in the process of writing papers; we're targeting a symposium for 1st or 2nd quarter, 2006. After that, it's up to you to help us decide what to do.

James MacGinnitie is a former president of the SOA.

Emily Kessler is SOA staff fellow for retirement systems.

The fertility rates quoted in this article were taken from the United Nation Statistics Division; go to for more information.