Longevity increases pension problems

13 Oct, 2014 by John Seiler

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To the consternation of government pension planners, Americans just keep living longer. AP reported:

NEW YORK (AP) — Americans are living longer than ever before, according to a new government report filled mostly with good news. U.S. life expectancy inched up again and death rates fell.

Rates also dropped or held steady for nearly all the leading causes of death.

But if people live longer, they take more in pensions. In the the private sector, that’s not a big deal. Almost all firms have switched to “defined contribution” plans, in which employees contribute to funds investing in private companies. If the retiree lives longer, his investments in the plan just keep paying dividends. If there’s a big recession and investment funds decline, then the retiree gets less — too bad, but at least nobody else is on the hook.

By contrast, most government employees still are on “defined benefit plans.” The funds are supposed to pay out large benefits no matter what happens to the investments of such funds as CalPERS and CalSTRS. If the investments tank during are recession, taxpayers are on the hook — at least theoretically.

Longevity comes in because, if defined-benefit retirees live longer than actuaries had anticipated, the pension fund has to pay out more. Unless investments rise much faster than anticipated — something unlikely — the taxpayers inevitably must pick up the extra payments.

Also slammed are tax-funded retiree health plans, which obviously will cost more if people live longer.

But also damaged financially will be Social Security and Medicare, which already are the major contributors to the federal government’s incredible $200 trillion (with a “t”) in unfunded liabilities, according to calculations by Boston University economist Laurence Kotlikoff. That’s more than $700,000 in debt the feds ran up for for each person in America; more than $2.8 million for a family of four.

It can’t last.

It’s why pension reform is inevitable. The longer it takes, the more pensioners will be hurt.