Experts Ponder Implications of Longer Life Spans
Experts Ponder Implications of Longer Life Spans
By Ronora Stryker
In my family, discussing finances is taboo. My parents are of the generation that thinks issues like these are best kept to themselves. That is why I was shocked recently when my parents contacted me wanting help with how to protect their nest egg during their remaining retirement years. I was immediately struck with the question of why they were thinking about this now as opposed to years earlier when they were still working or even soon after retirement. The response I received was they always felt they had enough money until recently when they discovered they might not be able to afford to relocate given future expected health and long–term care needs and the desire to leave money for their children.
Challenges to my parents and other individuals in ensuring they have enough money to live for the rest of their lives was just one of the themes explored in the session "Implications of Longer Life Spans: What Does It Mean To Us?" presented at the recent Society of Actuaries (SOA) 2008 Living to 100 Symposium. In this session, experts were assembled to speak about the opportunities, pitfalls and challenges of aging from five differing stakeholder views: the individual, the employer, life insurance and annuity companies, long–term care insurance companies, and the health care system. The moderator, Anna Rappaport of Anna Rappaport Consulting, noted that the issue of living to 100 affects society broadly. This point is illustrated by the diverse stakeholders. The stakeholders are also representative of the differing audiences actuaries serve.
Steve Vernon, an actuary and president of Rest–of–Life Communications, represented an individual's risk management perspective. He indicated that a major challenge to this stakeholder group results from the decline of the defined benefit pension system in the United States and the emergence and popularity of the defined contribution pension system. With this system change, an employee must decide how much to save while working, how to invest these assets, and the amount of assets that is sufficient for a comfortable retirement. Upon retirement, the employee must decide how to invest and draw down these assets so he/she doesn't outlive his/her resources. Many people are struggling with these decisions, and are not making informed decisions. A challenge exists in getting people motivated and educated to save and be able to effectively manage their finances.
Vernon provided an example to illustrate the challenge. The average 401(k) balance in the United States for people in their 50s and 60s is about $100,000, which may seem like a large amount of money. However, studies also show the average amount of money needed just for retirement medical expenses is $100,000 per person. In such a case, the medical expenses alone offset this balance! He concluded that people will need to work longer than they thought in order to have enough money to last a lifetime. Consequently, early retirement will be infrequent and an individual's age at full retirement will likely increase to the late 60s or early 70s.
One strategy individuals can adopt in reducing the chance of having assets drained by high medical expenses is to take care of one's health. By eating right, exercising, managing stress and maintaining a positive lifestyle, research suggests one can reduce the odds of getting expensive, debilitating chronic conditions such as heart disease, cancer, diabetes, dementia or osteoporosis by roughly 50 percent. A challenge related to this strategy is behavioral. How can we get individuals to make lifestyle changes?
Vernon stated there is emerging research indicating that individuals who work to later ages are healthier and live longer. This suggests Americans should think about a holistic lifestyle approach for living to older ages such as working to later ages by doing more enjoyable work but working fewer hours than during the height of their careers; being engaged in life; living healthy lifestyles; and having a good financial strategy for making their retirement savings last the rest of their lives.
The panel added other perspectives on an individual's risk management as well:
- Women are much more likely to live to very high ages, and women alone are much more likely to be poor or near poor. Forty percent of elderly women have virtually no money other than Social Security.
- The challenges of not enough money in retirement are likely to be felt later in retirement than in the early years, so people who are short–term planners are much more likely to have problems later.
SOA research also provides insight into the challenges of the individual effectively dealing with longer life. It demonstrates a combination of gaps in knowledge and failure to plan for the long term. To find the research, check the SOA Web site for Post–Retirement Needs and Risks
Valerie Paganelli, a senior consulting actuary with Paganelli Consulting, followed the individual stakeholder discussion and represented views of a myriad of employers she consulted with over the years. She opened by saying that longevity and its implications are a blind spot for the vast majority of employers. While most companies understand the opportunities and challenges an aging population will create in the marketplace, they do not understand how longevity impacts their internal workforce. One of the major challenges a company faces in trying to accommodate an aging workforce is examining how big a shift it needs to make in its culture and internal structure to sustain its business model.
Employers are responding in various ways. They are either realizing there is an opportunity and have decided to lead the industry in developing strategies to accommodate aging employees, or they are ignoring the challenges until they become a problem. Examples of industries that are acutely impacted by an aging workforce but have been more focused on how to provide products and services are automakers, utilities and hospitals.
Organizations are also responding to the aging workforce and the desire of those individuals wanting to extend their working lifetime by allowing part–time employment. Surprisingly, some companies have never had a part–time employee and are building the internal structure to support this.
Phased retirement is a very logical response to the interest of employees in working longer on a reduced basis. About one–third of companies allow informal phased retirement, but very few have formal programs. This is an important area for evaluation and development.
Paganelli indicated that companies in this situation can do benchmarking against an industry that has historically allowed part–time employment to learn the framework for supporting and managing part–time employees. She also recommended that these companies do scenario planning and project their workforce by comparing their current policies to what they would like to do. With this analysis, companies can identify the gaps that need to be addressed.
Life Insurance and Annuities Company Stakeholder
Dave Sandberg, vice president and corporate actuary of Allianz Life, next discussed the distribution and marketing of life insurance products and annuities to individuals planning their financial future. His company, three to four years ago, sponsored research to assess the issues being faced by those in the second half of life. The key insight was that the questions were less about the money and far more about transmitting values and life's lessons. So, beyond just making sure one can manage the risks of retirement (and living too long), is the added consideration of managing what will outlive us as an individual.For many older individuals, planning for a legacy means planning not just for one lifetime, but for two or more. Too few in the marketplace understand the public's desire to link their values and their money. Consequently, the opportunity (and demand) for the advisor/agent will be to include an openness to fit advice to personal values and to move the conversations from product to process.
With the increased older population and desire to leave legacies, trillions of dollars will be given to the next generation. A challenge for both the individual and the corporation will be sorting out often conflicting and/or partial information when there is so much money in play and many institutions competing as custodians of that money.
Sandberg ended his talk by addressing how products will change in the future given increased life spans and more individuals at retirement ages. While individuals can currently buy an immediate annuity to guarantee a payment stream during retirement, few people do this. The changing landscape of retirement will likely lead to products that include both some kind of lifetime guarantee while giving some flexibility of control and access to funds throughout the retirement period.
Long–Term Care Insurance Stakeholder
Dawn Helwig, a consulting actuary with Milliman, was the fourth presenter and shared her thoughts on the evolution and future of long–term care insurance. The funding of long–term care (LTC) is a modern–day problem. Only about 7 percent of the over–age–55 population owns LTC insurance. This raises the question: Who is paying for the remaining LTC services being provided? Obviously, one source is individuals wealthy enough to afford the cost of these services. The other major source is Medicaid programs.
LTC services are costly. Studies have estimated that for an individual to be 90 percent confident he/she will be able to cover all his/her LTC expenses, the individual will need $500,000. It is not surprising that life savings could be easily drained if individuals have not financially planned for their LTC needs. Generally, in cases where individuals have not done much planning, they try to protect their assets for their family by divesting them prior to entering the LTC facility. After divestiture, the individual qualifies for Medicaid and this program ends up paying for his/her LTC needs. Clearly, Medicaid programs were not designed for this purpose.
With the increasing aging population, the way LTC has been financed in the United States is likely to change as funding levels for state Medicaid programs deplete. A big challenge is getting more of these people who are divesting their assets to qualify for Medicaid to take responsibility for their LTC needs. Private LTC insurance was designed to fill the demand. However, as indicated by SOA research, many people are not focused on longer term planning or risk management.
Helwig went on to describe LTC insurance as a teenager. Similar to teenage years, LTC insurance has seen a little bit of trouble—which has made the insurance programs unpopular to the consumer. Pricing missteps have occurred requiring rate increases on existing products and higher prices on new LTC products. Companies have also changed claim payment practices and are not considering paying anything outside of the contract provisions. While there have been problems in the past, she indicated that the teenage years for LTC insurance appear to be ending as the pricing and product have stabilized and future market demand is likely to increase.
Health Care System Stakeholder
Tim Harris, a consulting actuary with Milliman and co–chair of the Living to 100 Symposium planning committee, represented the fifth stakeholder and focused on the future capacity of the U.S. health care system. The challenge facing the health care system is: Will it be able to support the changing demographics as Baby Boomers age? To answer this question, Harris modeled the future supply and demand of health care through the year 2100.
In looking at hospitals, he indicated a surge in admissions is expected as the U.S. population ages, yet the projections indicate when examining hospital capacity in the aggregate, there may be sufficient capacity to accommodate the increase. Some of the modeling considerations offsetting the admission surge and contributing to this result include:
- A trend that is likely to continue in the future: shifting hospital services to outpatient.
- A continued trend in more efficient delivery of inpatient services that reduces the length of hospital stay.
- A current excess in hospital capacity of 30 percent.
- A healthier U.S. population in the future as more individuals continue to adopt a healthier lifestyle.
For outpatient surgery facilities, projections show a different picture in that there will not be enough facilities for the increased demand. Harris noted assuming outpatient facilities grow at the same rate as the under–age–65 population, an additional 1– to 2–percent annual increase per year in facility growth would still be needed to accommodate the future older age population.
There will be an even greater shortfall of physicians and nurses. While there will be greater need for physicians with the changing U.S. demographics, the U.S. population is not growing fast enough to provide the number of new physicians needed. Harris projects the physician shortfall to be 9 percent per year in aggregate with extreme shortages by specialty and by region.
The model also indicates there will not be enough nurses to meet the increased demand of the future elderly population and an extreme shortage will occur. This is not surprising given the current nurse shortage estimated at 200,000 and expected to grow to over 1,000,000 by 2020.
Harris concluded by sharing his thoughts on the eventual impact to commercial health insurers from the increasing aging population. He explained that Medicare will be paying the health care costs for retirees at rates set by Centers for Medicare and Medicaid Services (CMS) and medical providers may not want to take on many more Medicare patients at these levels of reimbursement. Another impact of the lower reimbursements by CMS will be continued cost shifting to commercial health insurers as providers try to find ways to make up for the lower level of Medicare payments.
On a personal note, one of my discoveries from the panel presentations is that my parents are unfortunately part of the norm when it comes to planning for retirement and managing retirement savings. They have taken the short–sighted approach to financial management thinking that once they have money, it will always be there.
My parents' experience leads into one of the many takeaways from this session. Planning for financial security during retirement years is important. But for many individuals, long–term planning is not part of their method of operation. In addition, they have not sought out the resources needed for successful planning.
Other important takeaways emanating from the session include:
- The impact of longer life will be felt through– out many parts of society.
- The impacts will grow over time as more people reach higher ages and need more services.
- Working longer will be important in the future.
- Business will need to adapt to create opportunities and options for this to happen successfully.
- There are great needs not yet being well met, and opportunities to do a better job of meeting those needs exist.
- While there are gaps in knowledge and preparedness, it is increasingly clear that education alone will not fill the gaps.
With increasing life spans and the growing older–aged population affecting society so broadly, this article just begins to touch the surface of the many issues discussed by the panel. For a more in–depth account of the session, I encourage you to read the full transcript of the session published in the 2008 Living to 100 Symposium Monograph.
Clearly, much remains to be done when it comes to planning for our retirement needs and the needs of the increasing aging population and this creates a great opportunity for actuaries to be a part of the solution.
Ronora Stryker, ASA, MAAA, is a research actuary for the Society of Actuaries. She can be contacted at firstname.lastname@example.org.
Quotes: "One strategy individuals can adopt in reducing the chance of having assets drained by high medical expenses is to take care of one's health."
"... the U.S. population is not growing fast enough to provide the number of new physicians needed."