Living to 100 and beyond: Implications of longer life spans

North American Actuarial Journal, Jul 2002 by Rappaport, Anna M, Parikh, Alan

V. IMPACT ON BUSINESSES IN GENERAL

Although specific industries will find new and growing opportunities with the elderly, virtually every industry will face new problems as well. Many organizations will feel the impact of population aging in their employee benefit plans even if they do not see it in the demand for their services.

In the United States, as in many industrialized countries, corporations have made long-term commitments to many of their employees and retirees to provide lifetime pension benefits and medical benefits upon retirement. Medical benefits are often subject to annual review and modification. In some countries, these benefits are controlled by government mandates. In other countries, these benefits have been offered voluntarily but are subject to various legal and societal restrictions on how they may be modified or taken away. Accounting rules have forced U.S. companies to place liabilities on their balance sheet to reflect the projected long-term costs for these benefits. New international accounting rules create similar requirements for companies worldwide. In response to finding their long-- term promises generating higher operating costs and reducing shareholder equity, many companies have scaled back or terminated these commitments.

As the table illustrates, greater longevity tends to have a greater impact on postretirement health care liabilities. This is because the cash flows generated by these plans tend to grow with medical inflation, magnifying the costs of the last years of life. Pension obligations, on the other hand, are typically not indexed to inflation and therefore are not as sensitive to longevity. However, pension obligations are typically prefunded, while postretirement medical obligations are typically unfunded. As a result, relatively small changes in pension obligations can have a leveraged impact on a pension plans' surplus or deficit position, resulting in large swings in annual costs.

In general, greater longevity magnifies the size of these defined benefit and postretirement health care obligations, and creates further incentives for companies to scale them back to the extent possible.

Likely Employer Actions

The unfortunate outcome of these likely employer actions will be to increase the risks that the elderly face in retirement further. As successive cohorts of the elderly live longer, they will be less and less likely to have guaranteed pension income or postretirement medical insurance. This further increases the burden on individuals to start planning earlier and earlier in their working careers for retirement, and correspondingly increases the burden on their employers to help them understand postretirement risks and to give them the necessary tools to help them prepare. In addressing this obligation, employers have access to a number of tools:

* Many offer their employees tax-advantaged savings plans, and more employers have become aggressive about enrolling their employees in these plans and in communicating their advantages.