People across the modern world are living longer. It’s a fact that is, without question, one of humanity’s greatest accomplishments. And hey, personally, we’re pretty jazzed about it—we’re guessing you probably are, too. However, while this reality is great for each of us individually, it doesn’t bode well for defined benefit plans that are, by design, predicated on the assumption that people in the system will set off for greener pastures within a certain amount of time. It’s morbid, yes—but true.
You’ll recall from the second blog in this series that defined benefit plans like that provided by the Colorado Public Employees' Retirement Association (PERA) supply retirees with a predetermined monthly income for the rest of their lives. It’s one of the most attractive benefits of this kind of retirement plan, but when those payments end up stretching on for two or more decades, it can become pretty expensive to support. Times that by thousands—nay, hundreds of thousands—of multiple-decade retirement “salaries” to cover, and…you get the picture.
The chart below shows how lifespans have increased over the years. In 1945, assuming a retirement age of 65, pensions paid out approximately 12.6 years for men (which means that men were typically living to be about 77½), and approximately 14.4 years for women (which means that women were typically living to be about 79½). As of 2015, those payout periods and corresponding lifespans have increased to 15.9 years/81 (men) and 19 years/84 (women), and, by 2045—when many of us older millennials will be planning to retire—those numbers are projected to increase once more to 20.2 years/85 (men) and 22.4/87½ (women). So, we’re living about seven to eight years longer than peeps in the 1940s (yay!), but that also means that pension systems across the U.S. are having to pay out additional benefits for those years (no Bueno).
But that’s not all, folks. Compounding the implications of people living longer is the fact that, at least in the U.S., we’re also experiencing lower birth rates. Attribute it to what you will, but the average number of children born to a woman over her lifetime declined from 3.5 during the late 1950s/early 1960s, to less than 2 by the mid-1970s—and has pretty much hovered there ever since. With fewer kiddos being born, that means there are fewer bright-eyed-and-bushy-tailed “replenishments” to enter the workforce and balance out those retiring. Seeing as defined benefit plans depend on a steady stream of contributions from active workers and their employers, you can see how this makes an already dicey situation…well, even dicier.
Here’s a little snapshot of how the “elderly dependency ratio” (the number of elderly individuals relative to the number of “prime age” individuals) has changed over the years:
- In 1945, for every one retiree, there were 8 people in the workforce to support him/her
- In 2000, for every one retiree, there were 4.8 people in the workforce to support him/her
- In 2015, for every one retiree, there were 4 people in the workforce to support him/her
- In 2045, it’s projected that, for every one retiree, there will be just 2.6 people in the workforce to support him/her
So yeah…these two demographic realities aren’t exactly helping Colorado PERA and other pension systems like it. Lucky for us, though, the PERA Board Trustees will be introducing during the 2018 legislative session a recommended package of changes that'll address the plan’s financial health, and ensure its sustainability in the long-term. We’ll get into the nitty gritty of what those changes entail in our final blog in the “Pensions 101” series.