Session 3C, Challenges and Strategies for Financing an Increasingly Long Life Moderator: David G. Boettcher, FSA, FCIA, MAAA Presenters: Vickie Bajtelsmit, Ph. D. Liz Davidson Benoit Miclette, FSA, FCIA Challenges and Strategies for Financing an Increasingly Long Life
SESSION 3C
Moderator: David Boettcher
05 January 2017
Polling Question 1:
Until what age do you expect to live?
a.
b.
c.
d.
e.
Less than age 70
Age 70-79
Age 80-89
Age 90 – 99
100 or older
Colorado State University
Funding a Long Retirement: Potential Strategies and Solutions
Vickie Bajtelsmit, J.D., Ph.D.
Colorado State University
Presentation at the 2016 Annual Meeting
of the Society of Actuaries
SOA 2016
Colorado State University
“Challenges and Strategies for Financing an Increasingly Long Life”
Vickie Bajtelsmit, Tianyang Wang, and Anna Rapaport This presentation summarizes the main results of a research project
and report by authors Vickie Bajtelsmit, Tianyang Wang, and Anna
Rappaport (December 2015) which was funded by the Society of
Actuaries. The opinions expressed and conclusions reached by the
authors are their own and do not represent any official position of the
Society of Actuaries or its members. The SOA makes no
representation or warranty to the accuracy of the information.
The full report is available on the SOA website here.
Colorado State University
Longevity Risk
Dramatic life expectancy improvements over the last
100 years
Colorado State University
Life Expectancy Trends
Born In
Male: Birth
Female: Birth
Male:65
Female: 65
1950
73.8
79.8
19.3 (=84.7)
21.6 (=86.6)
1970
77.3
82.3
20.7 (=85.7)
22.8 (=87.8)
1990
80.5
84.8
21.8 (=86.8)
23.8 (=88.8)
2010
82.7
86.5
22.8 (=87.8)
24.7 (89.7)
Source: 2014 OASDI Trustees Report, Table V.A4 Cohort Life Expectancy
• Age 65 life expectancy ~5 years more than at birth.
• Women live longer than men.
• Large differences by socio-economic group and health
status.
Colorado State University
The Oldest Old are Women
Probability of Living from Age 65 to Older Ages Age
80
85
90
95
100
Male
60%
40%
20%
6%
1%
Female
71%
53%
31%
12%
3%
Source: Key Findings and Issues, Longevity, (SOA, 2012). Estimates based on Social Security Administration mortality tables. Originally from an Academy of Actuaries webinar "Lifetime Income‐‐Risks and Solutions" sponsored by the Academy's Lifetime Income Risk Task Force (March 7, 2012)
•
Nearly 2/3 of people over age 85 in the US are single women.
•
Widows and divorced women are more likely to be living in poverty
than married couples.
•
Conclude: the issues of the very old are primarily womens’ issues.
Colorado State University
Polling Question 2:
What age will you (or did you) fully retire ?
a.
b.
c.
d.
Age 65 or younger
Age 66- 70
Age 71 or older
Never
Colorado State University
Retirement Age Trends
With greater longevity, there has not been an extension of the
average period of worklife.
Documented decline in age of retirement for both men and
women in developed countries. (Greater for men)
This implies that households need substantially more wealth to
fund a longer retirement period.
Colorado State University
Who is Impacted by Longevity Risk?
Pension funds
• Corporate Sponsored
• Government Sponsored
Annuity Providers
• Insurance companies
• Reinsurance companies
Life/LTC Insurance Providers
• Insurance companies
• Reinsurance companies
Focus of most actuarial and
insurance research on longevity
risk.
Securitization Providers
• Investment Banks
• Reinsurance Companies
Individuals
Focus of this study
Colorado State University
Household Risk Management
• The risk of living long needs to be incorporated in
household retirement planning.
• There are risks associated with both resources and
expenses.
Retirement Resources/Risks
Pension
Social Security
Medicare/
Medicaid
Annuity
Insurance
House
Investment
Human Resources
Retirement Needs/Risks
Living Expenses
House
/Mortgage
Health Care
Long Term Care
Colorado State University
Inflation
Polling Question 3:
Which of the following post‐retirement risks worries you the most?
a.
b.
c.
d.
e.
f.
The risk of living too long
Long term care costs for self
Long term care costs for others
Health costs
Investment risk
Inflation risk
Colorado State University
Empirical Methodology
Objective 1: Determine wealth needed at retirement to fully fund retirement needs for households with different longevity at 50% and 90% confidence levels.
Objective 2: Investigate risk management tools that can reduce the risk of cash shortfalls
Analytical Method: Simulation incorporating risky distributions for each post‐retirement risk Investment risk
Inflation risk
Longevity risk
Health risk Long‐term care risk. Colorado State University
Simulation Framework
Detailed cash flow forecast from retirement to death for representative U.S. retiree households We run the model for the 50th and 75th percentile households based on income and wealth.
Simulate 50,000 alternative life paths
1) Base case: no risk mitigation strategies Longevity Focus: Consider the difference between outcomes for “normal” longevity versus the longest lived households 2) Compare base case to scenarios with various risk mitigation strategies and products.
Colorado State University
Summary of Model Assumptions
Characteristics
Total Pre‐Tax Income Husband (age 62)
Wife (age 62)
Base Case Housing
Home Equity Mortgage
Non‐Housing Wealth
Social Security Status
Defined Benefit
LTC Insurance
Desired Standard of Living in Retirement
75th Percentile Median Household Household $60,000 $105,000 H: $42,000
H: $74,000
W: $18,000
W: $31,000
Home‐Owner
Home‐Owner
$180,000 $315,000 No Mortgage
No Mortgage
$100,000 $250,000 H:Fully Insured W: Qualifies on H’s Earnings
Both retire at full retirement age (66)
Base Case: None
Base Case: None
Retirement period same as pre‐retirement
Colorado State University
Risky Distributions in the Model
Investments: Bond/stock portfolio; % stocks = (100 – current
age); LT historical return distributions: 1947‐2012.


Inflation: CPI‐U (General inflation); CPI (Medical Costs)
Health Expenditures: Min = Medicare Part B premiums,
lognormal distribution

Long‐term Care: Separately model probability of entering LTC
and length of stay based on Friedberg, et al. (2014)


Mortality/Longevity: Social Security Administration life tables
Colorado State University
Note: HH Joint Life Expectancy is Much Longer Than Single
Higher prob. of
living into the tail.
Colorado State University
Base Case Distribution of Wealth Needed at 66
Objective: sufficient wealth to fully fund all cash flow needs to maintain the
preretirement standard of living.
Median Household
75th Percentile Household
Colorado State University
No Big Surprise: Living Longer Costs More
Base Case Results: Wealth Needed at Age 66 to be 50% and 90% Confident of Meeting All Simulated
Household Expenses, By Retirement Age and Longevity (in $000)
Scenario
Tercile, by Age of Second-to-Die
All
Median Household
(Pre-ret. Income Age 66 = $60,000)
Youngest 1/3
Middle 1/3
Oldest 1/3
50%
Conf.
90%
Conf.
50%
Conf.
90%
Conf.
50%
Conf.
90%
Conf.
50%
Conf.
90%
Conf.
Retire and Claim Soc Sec at Age 66 $290
$430
$220
$280
$300
$370
$400
$520
Retire and Claim Soc Sec at Age 70 $170
$290
$110
$170
$180
$250
$260
$380
All
75th Percentile Household
(Pre-ret. Income Age 66 = $105,000)
Youngest 1/3
Middle 1/3
Oldest 1/3
50%
Conf.
90%
Conf.
50%
Conf.
90%
Conf.
50%
Conf.
90%
Conf.
50%
Conf.
90%
Conf.
Retire and Claim Soc Sec at Age 66 $660
$880
$520
$630
$700
$790
$840
$990
Retire and Claim Soc Sec at Age 70 $410
$610
$300
$400
$440
$530
$570
$710
Source: Authors' calculations based on Monte Carlo simulation model.
Colorado State University
Age 66 versus Age 70 Retirement
Median Household
•
•
75th Percentile Household
•
Retirement wealth needed
is calculated as of age 66
to be comparable.
Delay to age 70 reduces
retirement wealth needed
at age 66 by:
• Increasing years to
save/invest
• Reducing number of
years to fund
At 90% confidence,
households need about 1/3
less at age 66 if they plan
to delay retirement the
additional 4 years.
Colorado State University
Next Step: Investigate RM Methods
Downsize discretionary expenses
Downsize housing
Reverse mortgages/annuities
Long‐term care insurance
Combination strategies
Conclude: RM strategies that reduce expenses help wealth last longer, but are insufficient to offset the effect of large shocks such as long‐
term care or extreme investment events.
Colorado State University
Sample of Housing Strategies Results
1. Downsize housing 30% = sell larger home, buy smaller and invest the net
gain; reduces property taxes, insurance, and maintenance costs
2. Reverse mortgage at 75 = Use housing equity to create life annuity income
Colorado State University
Sample of Long‐term Care Strategies
LTC product that covers expenses to maximum per day
Colorado State University
Example of A Successful Combo Strategy
Conclude: Combination strategies can reduce the amount of retirement wealth needed substantially.
The Effect of Combination Risk Management Strategies on Wealth Needed at Age 66 to be 50% and 90% Confident of Meeting All
Simulated Household Expenses, by Longevity (in $000), 75th Percentile Household (Preretirement Income = $105,000).
Tercile, by Age of Second-to-Die
All
Cumulative
Reduction in
Wealth Needed
Base Case: Retire at Age 66
+ Reverse Mortgage at 75
Middle 1/3
Oldest 1/3
50% Conf. 90% Conf. 50% Conf. 90% Conf. 50% Conf. 90% Conf. 50% Conf. 90% Conf.
Combination Strategy 2
Delay Retirement to Age 70
Youngest 1/3
$660
$880
$520
$630
$700
$790
$840
$990
($250)
($270)
($220)
($230)
($260)
($260)
($270)
($280)
($350)
($400)
($300)
($330)
($370)
($380)
($400)
($420)
+ LTC for Wife $250 Cap
($530) ($650) ($430) ($490) ($560) ($590) ($650) ($650)
Wealth needed for Combo
Strategy #2
$130
$230
$90
$140
$130
$200
$190
$340
Source: Authors' calculations based on Monte Carlo simulations.
Colorado State University
Summary
People in developed countries are living much longer than previous generations. The incidence of retirement has increased and the age of retirement has decreased.  Result: Much longer retirement periods than in previous generations.
On average, households are not well‐prepared to fund longer periods of retirement. In addition to longevity, retirees are exposed to other post‐retirement risks that increase costs/deplete savings. The longest‐lived are more exposed to these risks.
This study shows that there are risk‐mitigation strategies that, in combination, can increase the chances of a successful retirement
Live Long and Prosper: Inflation‐adjusted life income or benefits provide the most benefit for the long‐lived. Colorado State University
Living to 100 Symposium:
Challenges and Strategies for
Financing an Increasing Long Life
Ben Miclette, FSA, FCIA
Head of Global Living Benefits
Date: January 5th, 2017
Challenges and Strategies for Financing an Increasing Long Life
The Long Term Care view
 A closer look at the model
 The Big LTCi Dilemma
 International LTC offerings
 Burgeoning solutions
27
Challenges and Strategies for Financing an Increasing Long Life
The Long Term Care view
Quote from the paper:
“The purchase of long-term care insurance on
one or both spouses has only a small effect on
wealth needed at retirement…“
28
Challenges and Strategies for Financing an Increasing Long Life
The Long Term Care view
* RIP *
HERE LIES
LTCI
…IT DID THE
BEST IT
COULD.
29
Challenges and Strategies for Financing an Increasing Long Life
The Long Term Care view
From the NAHU Long Term Care Position Paper (January 2016):
“…many individuals will require long term care services and supports (LTSS) to
manage the many health conditions that develop due to aging. While the need for
LTSS is not just for the elderly, those ages 65 and older are eight times more likely
to need care than those under 65.”
“…approximately 133 million Americans are living with at least one chronic
condition, which can eventually lead to the need for LTC. By 2030, that number is
projected to increase to 171 million.”
30
Challenges and Strategies for Financing an Increasing Long Life
The Long Term Care view
The CLHIA (2012) evaluated the obligation that would be associated with LTC
expenses of Canadians over the next 35 years, the time for baby boomers to pass
through their retirement years (total population 35 million; 1 C$ = 0.78 US$) and
concluded:
“Conservatively, the cost in current dollars, of providing long-term care over this
timeframe is almost C$1.2 trillion. Current levels of government programs and
funding support will cover about C$595 billion of this total cost. As a result,
Canadians currently have an unfunded liability for long-term care of C$590 billion
which is the equivalent of 94 percent [of] all individual registered savings plans in
Canada today.”
31
A Closer Look at the Model
32
Challenges and Strategies for Financing an Increasing Long Life
LTC aspects of the model
 Purpose of the model was on financing a long life, not LTC specifically
 Premium and benefit payments
• “Average” policyholder finances “average” expected benefits
• Leads to conclusion of little gain from LTC insurance…if products priced properly
 Uses average market premiums, but claims from facility care only
• Market premiums most likely would include home care and other benefits
 Long elimination period
• Takes Medicare out of the equation
 Affordability
• LTC primarily purchased by wealthier individuals
33
Challenges and Strategies for Financing an Increasing Long Life
Possible further refinements
 Use of more recent data
• Selection impact, impaired mortality assumption
 Inclusion of other benefits
• Home care, assisted living facilities
 Addition of features for surviving spouse
• Shared benefits pool, waiver of premium on surviving spouse
 Look at higher quantiles of LTC payments
• Those surviving longer than average
 Assess the cost of not buying LTC insurance
• Wealthy, but did not qualify – what happens to them?
34
The Big LTC Dilemma
35
Challenges and Strategies for Financing an Increasing Long Life
The Big LTCi Dilemma
Polling Question 4
As a consumer, what do you consider is the
biggest issue with LTCi?
a. Lack of education around the need covered
b. Affordability of insurance premiums (short and long
term)
c. Product designs not addressing all needs
d. Social issue which should be covered by social benefits
e. Other
36
Challenges and Strategies for Financing an Increasing Long Life
The Big LTCi Dilemma
Polling Question 5
How do you intend to cover future potential
LTC-related expenses?
a. LTC insurance
b. Non-LTCi
means
37
Challenges and Strategies for Financing an Increasing Long Life
The Big LTCi Dilemma
Buy LTCi
protection
and risk
not using
it
No LTCi
and risk
needing it
38
Challenges and Strategies for Financing an Increasing Long Life
The Big LTCi Dilemma
Common arguments for low take up rates for LTC insurance:
 Belief that existing government benefits cover most long term care needs
 Trust that governments will take action to address the problem
 Immediate/extended family unit will provide required care
 Insurance products do not offer the safety of long term premium rate
guarantees
 Premium rates for LTCi are expensive, one cannot afford what is needed
 Needs analysis process is not appealing to sales force and potential applicants
39
Challenges and Strategies for Financing an Increasing Long Life
LTCi versus wish list
40
Challenges and Strategies for Financing an Increasing Long Life
LTCi versus wish list
41
International LTC offerings
42
Challenges and Strategies for Financing an Increasing Long Life
The Long Term Care view
Polling Question 6
What percentage of the world population is
covered by mandatory LTC coverage?
Source: Scheil-Adlung (2015)
a. < 1%
b. 1% to 5%
c. 5% to
10%
d. > 10%
43
Challenges and Strategies for Financing an Increasing Long Life
International LTC offerings
Government-Sponsored LTC Benefits:
 Categorized by OECD* as
• Universal or means-tested benefits
• Single or multiple programs
 Some examples include:
•
•
•
•
•
Part of a universal social security program, paid for by general tax revenues, e.g., Norway
Part of a social insurance programs, e.g., through payroll tax in Germany and Japan
Part of a means-tested safety net, e.g., Canada (certain provinces), U.S. (Medicaid), U.K.
Part of healthcare insurance, e.g., Belgium
Part of universal personal-care benefits, e.g., Italy (cash), Australia (in kind)
* Organisation for Economic Co-operation and
Development
44
Challenges and Strategies for Financing an Increasing Long Life
International LTC offerings
Private LTCi Benefits:
 Periodic LTC payment (per diem or reimbursement)
 Stand-alone lump sum
 Acceleration of life insurance or annuity payout
 Supplemental annuity payments
 Conversion/transition from disability income insurance to LTC policy
45
Burgeoning solutions
46
Challenges and Strategies for Financing an Increasing Long Life
Architectural equivalent of the perfect LTCi design
47
Challenges and Strategies for Financing an Increasing Long Life
What is the right approach going forward?
48
Challenges and Strategies for Financing an Increasing Long Life
Headwind in product development
 Let’s ignore the usual culprit: interest rates…
 Will mortality improvement continue?
 What is the mortality of impaired lives?
• Significant variations by medical conditions
 Mortality improvement in healthy or impaired lives?
• Who is getting healthier?
• Delayed dependence or longer chronic status?
49
Challenges and Strategies for Financing an Increasing Long Life
Headwind in product development
 Claim triggers that will survive evolution
• “Dressing” means putting on and taking off all
•
•
•
•
items of clothing and any necessary braces,
fasteners or artificial limbs.
“Hands-on assistance” means physical
assistance (minimal, moderate or maximal)
Instrumental Activities of Daily Living
Alternative care benefits
Etc.
 Large range of future health scenarios
50
Challenges and Strategies for Financing an Increasing Long Life
Do solutions already exist?
 Can mandatory social insurance save the day?
• Offering safety net for all who contribute
• Allowing supplemental/complementary coverage for wealthy
 Is it more about having a plurality of product designs?
•
•
•
•
•
•
Long elimination period / large deductible LTCi
Reverse mortgages
Combination products
Impaired annuities
Longevity annuities
Other?
51
Challenges and Strategies for Financing an Increasing Long Life
Or is it about…
Liz
52
CHALLENGES AND STRATEGIES FOR FINANCING AN
INCREASINGLY LONG LIFE
PRESENTED BY:
Liz Davidson
Founder and CEO of Financial Finesse
Flawed Lifespan Assumptions
 If considered at all, most people anticipate an average
lifespan based on Social Security life expectancy tables:
• 84.3 for Men
• 86.6 for Women
 Reality:
• 33% (one in three) married couples will see at least one
spouse live to age 92 (SOA).
We are NOT getting younger
 Improvements in life
expectancy mixed
• Some expect life
expectancies to increase
2.5 years per decade
• Others claim obesity,
disease, and environmental
factors will slow this rate of
increase somewhat
 But we ARE working less
• Most people will have
shorter careers and longer
retirement periods than
previous generations
Expected work life
1970
46 years
2009
38 years
% Diff
-17.4%
Expected retirement
13 years
23 years
+76.9%
Behavioral Change Needed
 Typical households do not accumulate sufficient income and
assets to sustain pre-retirement standards of living
throughout expected retirement periods.
 Multiple behavioral changes are necessary among both
individuals and institutions for retirees to improve their
prospects of maintaining a reasonable standard of living.
 A combination behaviors and strategies provide greatest
opportunities at overcoming these obstacles.
Strategies & Behaviors to Offset
Financial Risks Associated with
Living Longer
 Save early / Save often / Save
more
 Delay retirement
 Claim Social Security benefits at
later age
 Housing changes
• Downsizing
• Reverse mortgage
Polling Question 7
If you were to pick one, which of the following sources
is the most important to financing your desired
retirement income?
a.
b.
c.
d.
e.
f.
Delay retirement
Part-time post-retirement income
Downsizing or reverse mortgage
Accumulated savings
Private pension fund
Social security benefits
Strategies & Behaviors to Offset Financial Risks
Associated with Living Longer
 Insurance Decisions
• Annuity strategies
o Joint and survivor option
o Longevity annuities
• Purchase long-term care (LTC) insurance
• Cash out or borrow from cash value life insurance.
Strategies & Behaviors to Offset Financial Risks
Associated with Living Longer
 Combinations of the these
strategies have largest impact
 Employee financial wellness
programs
• Delay retirement to age 70
• Change behavior
• Reverse mortgage at 75
• Increase confidence
• LTC policy on wife only
Incorporate longer lifespan assumptions in retirement
projections.
Thank you.
Questions for the Panel?
62
Challenges and Strategies for Financing an Increasingly Long Life