Edition

Megatrends Impacting the Future of Retirement Plans

By Esther Peterson

Retirement Section News, October 2023

Some megatrends impacting retirement today are new, and some have been a topic of conversation for decades, but all of these trends are shaped by macro forces that uniquely define the present time. Trends and challenges that have been a focus among retirement actuaries since the 1980s include income disparity, flexible working arrangements, the extension of life, pension obligations in defined benefit plans, rising health care costs, inadequacies in Social Insurance systems, and housing and lifestyle choices in retirement. However, even if many trends and challenges remain important in the 2020s, we can better analyze them because we have more data. In addition, some of the forces that affect these trends have changed.

The Society of Actuaries Research Institute recently issued a report written by the Future Hunters: “Megatrends Impacting the Future of Retirement Plans.” This report analyzes different factors that are relevant to retirement. These include sociocultural, economic, technological, health and long-term care, and environmental factors.

The report addresses the question, “How is the future of retirement plans changing, and what can we do to be prepared?” in two ways. First, the report seeks to provide a framework for discussing the challenges in a new light, moving away from how we’ve thought about them in the past. Second, the report presents new topics for retirement practitioners to consider.

The report is divided into seven sections. This article will follow that design and describe each section of the report.

Section 1: Contextualizing the Future

The future results from forces at work in the present day and how those forces direct trends already in process. The forces that have come to the forefront in recent years are the rate of change due to technological innovation and developments in the labor force. In combination, these two forces permeate every aspect of how we live, work, and retire, which creates new or intensified challenges.

Technological, economic, and social changes are accelerating, creating a world of faster timeframes and quickly shifting expectations. Today, everything happens in shorter periods than in the past. Along with increased longevity and virtual reality, our life in the technological ether (“eLife”) is becoming increasingly a part of who we are. We need new and improved retirement options to meet our changing financial needs.

COVID-19 impacted the labor force in several significant ways by age group due to technology and working conditions.

  • The age 55 and older labor force experienced job losses in the early stages of the pandemic. Many people who retired after the start of the pandemic re-joined the workforce, in part because of the promise of higher wages and the option to work remotely. Economists project that this age group will take roughly half of new jobs in the next 10 years.
  • The pandemic accelerated and sometimes necessitated the displacement of human labor with artificial intelligence and robotics. Employers who struggled to find workers realized they could stop looking for employees and employ robots, chatbots, and autonomous vehicles instead.
  • Permanent remote and hybrid work arrangements created new opportunities to access talent, mostly to fill higher-wage jobs. The use of hybrid work has been found to create challenges in mental health due to the loneliness and isolation of remote workers.
  • The so-called “Great Resignation” forced employers to re-evaluate benefits and adopt new retention policies. Employers are formulating strategies to address how the increasingly transient nature of the workforce impacts the structure of retirement benefits.

Section 2: Sociocultural Trends

Several sociocultural trends are emerging that will have long-term effects on retirement-related needs. Some of these trends may be more unique to the United States, while others apply to all countries.

The “bespoke life” is a shift in which people tailor their life experiences to their needs and preferences, typically resulting in non-linear life trajectories. Older people might move in with their children, retirees might “unretire” and maybe even start a new career, and employees might quit their jobs to go back to school to further their education. The access to choices in how we live, work, and spend our money has created the need for employers to provide more portable retirement benefits that could move with a person throughout their working life.

As the industrial world ages, any business, research, or initiative related to aging people will need to be redesigned. Even though employers understand and have projected the upcoming retirement of millions of Baby Boomers, little has been done to prepare for significant losses of skill bases in the workforce and increased demand for services needed in retirement. Housing and finding ways to connect retirees in the community are two of the biggest challenges emerging from these trends.

Section 3: Redefining the Landscape—Economic Trends

For the aging population, one of the key economic areas to consider is the future of work, focusing on new opportunities to generate income.

  • The “share economy” (or “gig economy”) provides temporary employment opportunities and has shifted the workplace from “time and place” to “output-based metrics.” Using skills they have developed before retirement, retirees now have part-time or full-time employment opportunities that were previously less possible.
  • The “creator economy” provides a way for individuals to build audiences online and find a way to monetize these audiences. This alternative offers retirees opportunities to become creators, sell their influence, and be consumers of other creators.

Section 4: Redefining the Landscape—Technological Trends

Technological advances in artificial intelligence are quickly displacing human labor, including manual, cognitive, and emotional labor. The jobs most likely to be resistant to artificial intelligence are those requiring critical thinking, unique problem-solving, and interpersonal relations. We are also likely to see a resurgence of jobs that require manual labor (e.g., mechanics, carpenters, and plumbers), since this work is not easily automated. While this last group may have some access to pension plans, their access to retirement planning choices could be improved, which gives actuaries an opportunity for innovation.

Currently available technology is being applied in new ways.

  • Virtual reality (VR) technology companies are targeting a growing market for seniors. Social isolation is one of the greatest mental, physical, and emotional challenges for individuals in retirement and is estimated to increase the risk of heart disease and stroke by about 30%. VR can bring people together and might serve as therapy for loneliness. A VR tool is now available that enables people to visualize their financial lives, replicating market gains and losses without real-life consequences. It provides a new way for people to understand financial planning concepts.
  • To address Millennials and their need for financial education, employers are introducing games and financial planning apps for a greater impact and improved understanding.

Technological advancements in WEB3, the next iteration of the internet, will require extreme caution regarding misinformation and scams. Building trust will be one of the greatest challenges for financial institutions.

Section 5: Redefining the Landscape—Health and Long-Term Care Trends

The two trends having the greatest impact on health and long-term care costs are increases in life expectancy and the substantial rise in mental health-related long-term care needs, particularly for Alzheimer’s and dementia patients. The number of memory loss patients is expected to rise significantly in the upcoming decades. Family members are providing increasingly more caregiving, and these family members’ need for support is also growing.

Increased life expectancies are particularly challenging in the context of pension schemes where individuals bear the longevity risk (e.g., defined contribution plans). Older generations are more active than ever before, meaning the extension of life expectancy is effectively occurring at mid-life rather than the end of life. The changes in longevity forecasts from year to year are important to understand for accuracy in determining retirement liabilities.

Section 6: Redefining the Landscape—Environmental Trends

Climate change is one of the greatest concerns facing retirees, retirement communities, and our society. Many retirees live in coastal areas vulnerable to severe weather events that increase their risk of losing their homes. For many, these homes are their primary retirement asset, so losing them to a weather catastrophe can have devastating implications for the retiree’s financial well-being. The effect on the environment of people who move to locations to mitigate the impact of climate change (these people are sometimes called “climate migrants”) is becoming a concern. Not only is the climate migrants’ future fragile, but their needs strain the infrastructure of nations (and retirement systems) that take them in.

Section 7: Implications

The future of retirement is changing for several reasons, with certain trends shaping the outcomes and challenging us to solve problems in new ways.

Why is the landscape changing? Shorter employment periods are placing pressure on the functionality of defined benefit and defined contribution plans. Vesting periods may need to be shortened, and portability may need to be more of an option. Growing economic inequalities will require innovative approaches to tax codes and non-monetary ways to access goods and services. Greater life expectancies are creating less certainty in the future and an increased need for financial education to access lifetime income.

The roles in retirement security are shifting for individuals, families, communities, states, and government programs.

  • States are starting to sponsor retirement savings plans with mandated participation for those who do not have access to employer pension plans.
  • The current shortage of affordable housing is particularly difficult for older individuals, and there is room for innovation to address this.
  • Employers are starting to offer pooled defined contribution retirement plans, which somewhat mimic the security of defined benefit plans in that retirees no longer shoulder their own longevity risk.
  • With the loss of traditional family support systems for many retirees, communities are moving toward creating living opportunities that provide the needed support (e.g., the Village-to-Village movement).

The key to the future is creativity and innovation. We may need to shift our thinking from money to access, from “Is there enough money to pay for it?” to “If there’s not enough money, is there another way it can be accessed?”

Many policies are based on antiquated social realities. Rather than lumping all needs together and having enough money to cover all the uncertainties of the total that could be needed, separating out the needs and addressing them individually is beneficial. Tax policies could address some needs, such as allowing retirees to rent out space in their homes for additional income. Some needs could be addressed with better access to technology and education on how to use it.

It’s time to adapt to different ways of thinking about retirement, which will help us find better solutions for the future.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.

Esther Peterson, ASA, EA, MAAA, is a consulting actuary for Milliman and can be contacted at esther.peterson@milliman.com.