Advisers Can Help Solve the Economics of Aging

The existing retirement system was conceptualized at a time when there were just 15 to 20 people living in retirement for every 100 workers.

Art by Wenting Li

While modern medical advances and lifestyle changes allowing for healthier and longer lives are points to be celebrated, greater longevity is a cause for concern when it comes to retirement planning, says Ed Farrington, head of retirement at Natixis.

It’s not just the United States facing the longevity challenge. Developed nations around the globe are seeing their populations increase dramatically in average age. A 2018 Natixis report on the aging global workforce makes an example out of Japan, where 27% of people are currently over the age of 65. By 2050, the nation of Japan is expected to have 70 retirees per every 100 workers.

“It can quickly become very difficult for unprepared countries to support the growing portion of their populations living in retirement,” Farrington explains. “We are talking about retirement systems that were built on the expectation of having somewhere between 15 and 20 people living in retirement for every 100 workers. Seventy retirees per 100 workers simply becomes unsustainable.”

Data from J.P. Morgan’s latest Guide to Retirement shows the U.S. workforce is on a path much like Japan’s. The analysis shows that, for a healthy couple retiring today at age 65, the probability of at least one of the two living to age 75 is 97%. The figure drops only to 90% when the age rises to 80 years, and to 50% for 90 years.

Farrington and others note that, aside from the challenge greater longevity poses to individuals’ savings, this also poses a threat to nationwide systems, including Social Security and Medicare. Katherine Roy, chief retirement strategist at J.P. Morgan, emphasizes the fact that Social Security and government benefits like Medicare were always intended as supplemental. Such programs go a long way to helping a lot of people, but individuals must understand that these programs will not provide sufficient income or insurance coverage alone.

Sri Reddy, senior vice president for retirement and income solutions at Principal, agrees with that assessment. He adds that Social Security will be around in some form once Millennials reach retirement, but policy adjustments must be enacted for the system to remain viable over the long-term.

“Social Security is a foundation, but there needs to be small fixes to keep the system healthy,” Reddy explains. “Changes could include increasing the retirement age to 70 years old, or making a greater portion of Social Security income taxable.”

For advisers themselves, the slow but steady aging of the workforce will presumably drive a greater need for their services, according to Reddy. To serve the aging population, advisers could be called on to have greater understanding of Social Security, Medicare and more.

“The task of helping individuals transition away from the workforce is not going to get any easier,” Roy agrees. “This is always a very complicated, anxious time for people, and it is an area where advisers and guidance can be very helpful for those people transitioning.”

From a market value perspective, Roy believes the equity markets won’t see a negative shift tied to the aging population, as the growing number of retirees will need to continue to make investments and their spending of reserved assets will help drive a strong economy. One macro risk to be concerned about, though, could be the rising cost of health care.

“We get a lot of questions about what will happen as the Baby Boomers leave the workforce,” Roy says. “The reality is, really nothing specific is going to happen. When you’re in retirement, you’re still going to need growth, you’re going to need a balanced portfolio. You’re going to need to stay invested in equities.”

One reason that retirees will need to continue investing in growth assets is that some couples may need to spend as much as $363,000 to cover health care expenses in retirement.

“This fact is driving so much interest among Baby Boomers in Medicare claiming strategies,” Roy says. “If you had told me that three or four years ago, I would have been very surprised, because Social Security has always been more of a focal point.”