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Benefits and Pensions MonitorThe Demographics Of RetirementBy: Jim Helik When looking at the demographics behind retirement trends there are – as Donald Rumsfeld once put it in another context – the “known knowns,” in other words, the things we know we know. In our case, when we look towards the future, we can agree that more people will be reaching the age of retirement and that people will be living for a longer period of time once they make it to retirement. But what of the ʻknown unknowns,ʼ the issues we do not fully know, but which are derived from these generally recognized ʻknowns.ʼ A recent paper by Anna Rappaport presented to the Society of Actuaries titled The Future of Retirement – An Exploration and Comparison of Different Scenarios (May 2006, www.soa.org) looks past these general trends and notes the following:
It is this examination of what happens at the ʻtail endʼ of retirement, well past the age of 65, that makes for the most interesting reading. Take a look at the survival rates for a person who has already reached the age of 65 as of today (Chart 1). Survival Rates Note the differences between female and male survival rates. Women currently aged 65, have a more than 80 per cent probability of reaching age 80, while men have a probability of about 64 per cent of reaching that same age (of course, your mileage may vary). The last two columns have some important implications for retirement planning purposes. Retirement needs should not be assessed on an individual basis, but rather on a household basis. In this case, it would include an individual and his or her spouse. Taken together, it shows that a couple (with each spouse aged 65) today has a 50 per cent chance of both spouses reaching the age of 80. This results in a combined 30 ʻretirement yearsʼ (from age 65 to age 80, for each spouse) when the couple may not be earning their typical employment income. Unlikely Scenario The chart also shows that the probability of either spouse surviving for at least 15 years to age 80 is very high, more than 92 per cent. The odds of at least one spouse surviving to the age of 90 (a period of 25 years past their current retirement age of 65) is also very high, more than 57 per cent. Finally, what may seem to be a highly unlikely scenario – of one spouse reaching the age of 100 – is still likely. A couple, both aged 65 today, has an 11 per cent chance of one spouse reaching the century mark. Looking towards the future, these numbers will only get larger, leading to some results which are surprising (see Chart 2). Notice how the difference in life span by sex, while still existing in the future, may be narrower than it is today. The differences between the current rates and the forecasted rates are most obvious in the last two columns. In 40 years, more than one in four couples who reach the age of 65 will have one partner survive to the age of 100. This equates to spending almost as much time in retirement (35 years) as may have been spent working and saving for retirement. About threequarters of couples at retirement age in 40 years will have one spouse reach the age of 90. What is clear is that todayʼs ʻoutliersʼ are going to become far more common in the future. How we finance and care for these people who may be spending one-third of their lives in retirement is a key pension, health, and policy question, one which may fall into Rumsfeldʼs definition of a “known unknown.” Jim Helik is co-author of ʻEnergy Markets Risk Management,ʼ a textbook published by the Canadian Securities Institute. He also teaches at the School of Business, Ryerson University in Toronto. |
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