Reading Books For Longevity?

In celebration of National Book Lovers Day, it's worth noting that some scientists are extolling the virtues of words for good health. According to "Reading books could increase lifespan" by Honor Whiteman (Medical News Today, August 8, 2016), a new analysis suggests that regular readers have a greater chance of survival compared to those who use their time for other activities.

Utilizing Health and Retirement Study data for nearly 4,000 American adults, Yale professor Becca R. Levy, with Avni Bavishi and Martin David Slade found that "Books are protective regardless of gender, wealth, education or health" and "... are more advantageous for survival than newspapers and magazines in terms of cognitive benefits. (Click to purchase "A chapter a day: Association of book reading with longevity," Social Science & Medicine, Elsevier Ltd., September 2016.)

For bibliophiles everywhere, this discovery is good news indeed, assuming that their results apply to the population at large. 

Longevity Trends and Pension Costs

When it comes to estimating defined benefit ("DB") plan costs, it is critical to use inputs and assumptions that make sense. Longevity is one such important factor that demands attention. Getting good answers to questions about life span differences among age, income and health cohorts is necessary for decision-makers. The assessment of how to redesign a plan, transfer risk and/or modify investment strategy depends on knowing what variables determine the size of the liability.

Studies such as the one just released by the National Association of Pension Funds ("NAPF") and Club Vita (a Hymans Robertson Company) can be helpful to the extent that they shed light about how long participant groups are expected to live. In a November 27, 2014 joint announcement, its "unique" research is described as likely to result in companies having to report higher pension liabilities. Based on an assessment of data about 2.5 million pensioners and one million deaths, authors conclude that "the pace of longevity increases varies significantly within DB schemes and for different groups of DB pension scheme members." One inference is that the life span gap between men and women in the "hard pressed" economic category versus those who are "comfortable" is narrowing. A second finding is that a typical defined benefit plan liability is likely to rise by one percent.

As the researchers correctly point out, access to granular details about the sensitivity of the cost-demographic lever can be utilized by DB plan trustees when deciding if and how to restructure via a buy-out, liability-driven investing strategy or something else. Click to read "The NAPF Longevity Model" (November 2014).

Longevity Derivatives Seem Poised For Further Growth

If this photo of senior ski fans is representative of the upward global trend in longevity, creators of derivatives could be on to something big. Deal count suggests that 2013 will be described as a banner year for banks and others types of financial companies as their respective corporate clients, in search of protection against the greying of their plan participants, took the plunge to get rid of risks they find difficult to manage. Financial News reports a December deal for 2.5 GBP between AstraZeneca and Deutsche Bank that "will cover the drug company against the risk that 10,000 of its former employees will live longer than expected." This follows a 1 billion GBP swap between Carillion and Deutsche Bank and a second transaction between BAE Systems and Legal & General, also in December 2013. See "A shot in the arm for longevity swaps" by Mark Cobley (January 6, 2014) for more details.

Certainly the topic is gaining importance in policy-making circles and at an international level. In December 2013, the Bank For International Settlements ("BIS") released an updated version of a study about longevity risk transfer markets. The product of the Joint Forum on longevity risk transfer ("LRT") markets, the report strongly encourages those with regulatory authority to carefully track the nature of deals being done and by which organizations as a way to gauge capacity to handle risks being transferred to the financial sector. Longevity risk exposures should be properly measured and attention should be paid to the extent to which "longevity swaps may expose the banking sector to longevity tail risk, possibly leading to risk transfer chain breakdowns." The study likewise notes the importance of supervisors to be able to evaluate whether those in possession of longevity risk have the "appropriate knowledge, skills, expertise and information to manage it."

These words of caution make sense, especially given the large amounts at stake. In its December 20, 2013 press release, the BIS cites estimates of the aggregate "global amount of annuity- and pension-related longevity risk exposure" as ranging between $15 and $25 trillion. Based on World Bank data, U.S. Gross Domestic Product for 2012 was $16.2 trillion. It was reported at $8.2 trillion for China and $5.9 trillion for Japan. The implication is clear. Get it wrong and it could mean big losses for a delicate global financial system that has had its share of risk management twists and turns. Click to access "Longevity risk transfer markets: market structure, growth drivers and impediments, and potential risks" (Basel Committee on Banking Supervision Joint Forum, December 2013).

As at least one major bank moves forward to develop a longevity derivative instrument that is meant to be traded, expect more news from insurance company and banking regulators about capacity, internal controls, assessment of risk, posting of capital and adequate disclosure about the transfer of large amount of longevity risks to financial intermediaries. Risk Magazine author, Tom Osborn, describes some of the impediments to a full-scale launch of the longevity transfer market, including limited disclosure about how transactions are priced, absence of a liquid index that would facilitate cost-effective hedging and avoid capital adequacy-related basis risk problems and questions about how exposures should be accurately modeled. Click to read "Longevity: Opportunity or flop?" (September 20, 2013).

"Death" Derivatives and Longevity Related Pension Risks

As seniors continue to live hopefully fulfilling lives, plan sponsors grapple with how to best manage the costs. The realities of longer life spans for participants is creating all sorts of innovation on Wall Street, including what Bloomberg journalists recently described as "death derivatives."

In a May 16, 2011 article, Oliver Suess, Carolyn Bandel and Kevin Crowley describe products that could encourage defined benefit plan executives to "outsource" by transferring risks to longevity traders or entering into a financial engineering transaction in order to receive a regular cash flow that mirrors their respective ongoing obligations to retirees. What happens next, depending on how capital market participants respond to a few test cases, could mean the growth of a $23 trillion market in longevity bonds and related derivative instruments.

As with any financial engineering endeavor, education will be paramount in terms of both plan sponsors and securitized pension obligation buyers understanding underlying assumptions and risk-return attributes.

Click to read "Death Derivatives Emerge From Pension Risks of Living Too Long."

Unemployment at the Movies

If you haven't yet seen "The Company Men" with Ben Affleck, Tommy Lee Jones, Chris Cooper and Kevin Costner and don't need a lot of laughs, it's a worthwhile flick about the U.S. economic problems of late. The plot centers on a successful sales executive who gets the boot from a Massachusetts conglomerate that started out as a manufacturer of ships. A wholesale layoff of otherwise talented professionals still leaves the company exposed to a hostile takeover so another round or two ensues, with Affleck's boss ultimately getting the pink slip from his lover, played by a glamourous Maria Bello. (Hey, it's the Hollywood version of Corporate America.)

Similar to "Up In The Air" with George Clooney, this film's message seems to be that management is bad, labor is good and that family is what really counts. While I wholeheartedly endorse the message about counting one's blessings in the form of loved ones, friends and colleagues, I'm agnostic about the general "we versus them" theme and prefer to consider one company at a time.

If we've learned anything from the past decade, it's that production is increasingly mobile across borders. Beyond that, C-level leaders in the United States have a legal duty to their shareholders to create wealth (which is not necessarily the same thing as boosting the bottom line but that's a topic for another day). While I am not alone in opining that well-run companies recognize the importance of human capital (employees, clients, vendors) and that is why they can generate healthy returns for their investors, it is also important that individuals retool as often as is necessary to remain competitive.

In 2002, Daniel H. Pink extolled the virtues of independence in his best selling book entitled Free Agent Nation: The Future of Working for Yourself. The numbers speak for themselves with a continued increase in freelancers, temps, affiliated parties and smaller consulting networks that work from home or close by, create their own revenue path and are happy campers. However, for those who desire more stability and structure by working for larger employers, the concept of free agent is still worth pondering. Specifically, if your industry is changing around you, maybe it's time to take stock of how you stack up against others. My dad, now a retired engineer, went through this process about fifteen years ago when he took it upon himself to study computer assisted design at night since younger hires were facile with the newer technology tools and he was not.

As a young banker, I had a boss who urged me to think of myself as a box of raisin bran. Every year, he told me to figure out how to be "new and improved." I would complete a skills inventory checklist and then commit to improve as needed.

"The Company Men" was an enjoyable cinematic outing and a great reminder that dues paying never stops. Learning and career development is a lifetime endeavor, especially now. With longer lifespans and, for millions of people, the need and/or desire to work beyond 65 years of age, it is critical to stay current with requisite skills and experience.

Old Age Can Be a Bonus With a Price Tag

Enjoy this interview about longevity and pension risk management with Dr. David Blake, Director of the Pensions Institute. Professor Blake explains why understanding life expectancy trends across age, gender and socioeconomic groupings is so critical. He comments on new valuation rules that relate to financial statement transparency and share prices of plan sponsors. He differentiates between pension buy outs from pension buy ins and offers reasons why longevity swaps can be beneficial.

Click here to read "Longevity and Pension Risk Management," an interview with Professor David Blake, May 2010.

For other articles about longevity and pension risk management, visit http://portal.fiduciaryx.com/register/ for a complimentary subscription to best practices website, FiduciaryX.com.

Not 21 But Lots of Great Opportunities Ahead

A man is not old until his regrets take the place of dreams.
- - - - John Barrymore, "Good Night, Sweet Prince" 1943

If Betty White can rock Saturday Night Live to its highest ratings at the age of 88 and Sunset Daze is media gold for the senior reality television set, there is hope for anyone who wants to stay in the game rather than "retire" from the mainstream. In "Famous folks launched careers after 50" by CNN's Ethan Trex (May 16, 2010), more than a few individuals have realized great commercial success as seniors, including Colonel Sanders (of Kentucky Chicken fame), President Ronald Reagan and Takichiro Mori (twice reported by Forbe's as the world's richest man "with a net worth of $13 billion").

Good news is everywhere for the gray haired set if you accept current research about preservation and growth. In "Creativity and successful brain aging: Going with the flow" by Susan Krauss Whitbourne, PhD (March 23, 2010), having friends, enjoying leisure activities such as bridge or dancing and developing a "flexible mental attitude" are three hallmarks of a productive and enjoyable "later life."

At a time when the world is getting older, employers are challenged with managing the costs of providing post-employment retirement benefits as well as having skilled and experienced workers in place.

In a summary slide show, Business Insider excerpts from the 2009 EU Ageing Report to paint a sober picture of how age impacts gross domestic product ("GDP"), assuming that retired persons truly exit the economy and are given no opportunity to continue working in some fashion. (Keep in mind that official statistics do not fully capture actual employment.)

Country Pension Cost compared to GPD in 2007 Estimated Pension Cost compared to GPD in 2035 Estimated Change in Working Age Population by 2020
Netherlands 6.6% 10% -4.3%
Luxembourg 8.7% 17% -1.1%
Denmark 9.1% 11% -4.3%
Bulgaria 8.3% 9% -5.6%
Czech Republic 7.8% 7.6% -8.3%
Belgium 10% 14% -3.5%
Poland 12% 9.3% -5.7%
Hungary 11% 12% -5.0%
Italy 14% 15% -3.0%
Sweden 9.5% 9.4% -6.0%
Malta 7.2% 9.7% -7.1%
Greece 12% 19% -3.9%
France 13% 14% -5.5%
Finland 10% 14% -8.5%
Slovenia 9.9% 15% -6.6%

 

Things are not too much better in the United States with respect to financial solvency and unfunded retirement benefits. According to "The Market Value of Public-Sector Pension Deficits" by Andrew G. Biggs (Retirement Policy Outlook, American Enterprise Institute for Public Policy Research, April 2010), "public-sector pension plans have only a 16 percent probability of being able to cover accrued benefit liabilities with current assets."

The ramifications are huge in so many ways. Increased taxes, rescinded benefits or both are vote killers so you have to know that THE demographic time bomb is going to become political radiation in short order.

Until then, if you are healthy and able to continue working or are otherwise financially independent, enjoy the good life. Way to go!

Retirement Planning for Career Builders

You can probably never start saving soon enough for retirement. Estimated longer lifespans and competition for scarce disposable dollars are critical factors. Making matters worse, countless "Career Builders," fresh from college, are deep in debt. According to the American Association of State Colleges and Universities, "the average borrower graduating from a public college owes $17,250 in debt" while "one in four finishes school owing at least $22,822. Particularly worrisome is that the number of college graduates with at least $40,000 in student loan debt has increased 10-fold in the past decade." The problem is worse for those who do not earn a degree.

For financial advisors, the challenge is significant. Busy with work and families, how do you get the attention of 25 to 34 year olds?

Enter the American Institute of Certified Public Accountants (AICPA)and state-level CPA societies. In partnership with the Ad Council, they have created a new website called Feed the Pig™, replete with videos that convey the importance of thrift. The main character, Benajmin Bankes, even has his own My Space page.

Get Your Hands Off My Retirement Piggybank



Some things never change. On November 27, 1994, I wrote an op-ed piece for a local newspaper entitled "A prescription for Social Security" in which I warned of the entitlement mentality and the crushing debt load soon to be foisted upon young people everywhere. According to the editor, my suggestions for funding reform were not well-received, as evidenced by a flood of letters with the same message. "Keep your hands off my federal piggybank" and let someone else pay the price. (Like many others, I am an advocate of phased-in privatization for those who prefer to save on their own.)

Recognition of big problems ahead is certainly not unique to me. In his 1993 book, Generational Accounting: Knowing Who Pays, and When, for What We Spend, Dr. Laurence J. Kotlikoff warns of the great divide between the young and old. In their 2005 book, The Coming Generational Storm: What You Need to Know about America's Economic Future, Kotlikoff and co-author Scott Burns tell a grim tale of what has been chronicled many times before. A disproportionate number of persons are retiring from the work force, leaving those who remain to bear the staggering burden of a "pay as you go" system in the form of Social Security and Medicare.

Published last May, the 2006 Social Security Trustees Report states: "Over the 75-year period, the Trust Funds require additional revenue equivalent to $4.6 trillion in today's dollars to pay all scheduled benefits. This unfunded obligation is $600 billion higher than the amount estimated last year."

New York Times reporter Steven R. Weisman writes that Federal Reserve chairman Ben S. Bernanke is worried too, asserting that "Recent positive trends on the budget were a 'calm before the storm,' to be undone by huge deficits in federal entitlement programs. In "Fed Chief Warns That Entitlement Growth Could Harm Economy" (January 19, 2007), Weisman describes Senate testimony that sounds downright gloomy. "The longer we wait, the more severe, the more draconian, the more difficult the adjustment is going to be."

Unfortunately, as we know too well, attempts at entitlement reform are political folly and so the problem festers with little hope of short-term remedy

There are plausible solutions (hard ones but they do exist) IF only people would give up the ghost of an actual retirement piggybank in Washington, emblazoned with their names. In this case, Virginia - there is no Santa Claus.

Sorry kiddo!

Gray Power - Economic Implications



Credit illustrator Mike Dowdall for this delightful figurine. Now Art Director for Westland Giftware, after stints with Dakin, Portal, Hallmark and Bradford Exchange, Dowdall has created an entire line around the idea that "old is happening." (Click here to see more of his work.) Seeing a selection of this new product line in a local gift shop, I enjoyed a few chuckles but that's not all. It's yet another indicator that we are in for a radical change with respect to all things demographic. After all, no company is willing to commit funds unless they anticipate commercial success with lots of "geezers who get it."

Consider the following facts reported in "The Profile of Older Americans - 2005," published by the U.S. federal government. (Click here for a copy of the report.)

<< The older population (65+) numbered 36.3 million in 2004, an increase of 3.1 million or 9.3% since 1994. The number of Americans aged 45-64 - who will reach 65 over the next two decades - increased by 39% during this decade. About one in every eight, or 12.4 percent, of the population is an older American. Persons reaching age 65 have an average life expectancy of an additional 18.5 years (19.8 years for females and 16.8 years for males). Older women outnumber older men at 21.1 million. >>

This seismic shift in population make-up has the potential to impact every aspect of the U.S. labor landscape, not to mention the economic well-being of Corporate America. New York Times reporter Elizabeth Olson discusses the increased number of gray-friendly job boards. In "Some Web Job Sites Put Out 'Gray Hair Welcome' Signs," she writes: "Of the estimated 76 million baby boomers reaching retirement in coming years, some will start businesses. But the majority who continue to work will seek the familiarity and security of a regular paycheck."

At roughly twenty-five percent of total U.S. population, workers over 55 years could exert some serious bargaining power. Companies in desperate need of skilled workers will likely rethink their HR policies, including benefits that appeal to the "seasoned" set. That's on top of the oft-discussed cost of funding benefits for individuals whose lifespans are outpacing that of the trademarked Energizer Bunny.

Parenthetically, this pattern is not unique to the U.S. and arguaby more pronounced in countries such as Italy and Japan. Former U.S. Census Bureau Director Martha Farnsworth Riche describes "expensive housing, inflexible work practices, and persistence of traditional gender roles" as reasons for a reduction in new births, making seniors a large cohort in both an absolute and relative sense. (See "Population Aging: National Differences Make a Difference" - January 2004.)

Email us if you'd like some help in quantifying the relationship between demographics and your company's bottom line.

Mice, Red Wine and Escalating Health Care Costs



New York Times reporter Nicholas Wade describes research by the Harvard Medical School and the National Institute of Aging that could be a boon for vintners worldwide. Using experimental mice, scientists allege possible benefits of a "natural substance found in red wine, known as resveratrol". One group of furry creatures, fed a high-fat diet, accompanied with daily doses of resveratrol, gained weight but did not experience signs of medical problems and, "even more striking, the substance sharply extended the mice's lifetimes."

Wade describes a second gateway to expanded years - put the cupcakes away. Research done since 1935 shows that "mice fed a calorically restricted diet - one with all necessary vitamins and nutrients but 40 percent fewer calories - live up to 50 percent longer than mice on ordinary diets."

Elsewhere, Medicinenet.com quotes Mark Mattson, Ph.D and chief of the Laboratory of Neurosciences at the National Institute on Aging as likewise extolling the benefits of this approach.

"First, it reduces free radical production, or the production of highly damaging forms of oxygen, and the second is that calorie restriction increases the resistance of cells to stress. We think that both of these are important in protecting against a number of different diseases that have a negative impact on life span, such as cardiovascular diseases and cancer."

If you're panting to try cold kale soup and other goodies (similar to what my husband eats), click here to visit the site of the Calorie Restricted Society for more information.

Lest you are asking what this has to do with benefits, many experts now describe pension "problems" as tiny compared to a looming health care crisis - one that could wreak financial havoc across companies, big and small. So while the prospect of living longer is an amazing gift for many, there is a real cost of providing medical services to retirees. In some cases, post-employment exceeds work span by a significant amount.

At my request, Mr. Robert James Cimasi, president of Health Capital Consultants and author of The U.S. Healthcare Certificate of Need Sourcebook and countless articles and speeches, describes the situation this way.

"The US Healthcare Delivery System is facing what is perhaps its greatest challenge in the expected demand for increased health services from the aging of the baby-boom generation, the fastest-growing segment of the population. With the over 65 years old portion of the US population expected to increase from 20 million in 1970 to 69.4 million in 2030, the entire system by which healthcare services are dispensed in the U.S. is subject to radical change in the next two decades. As healthcare costs continue to rise faster than inflation in the overall economy, driven by advances in technology and treatment (as well as the growing baby-boomer population), pressures to reduce costs will result in a changed paradigm for healthcare delivery, most likely leading to some form of healthcare rationing. The potential result is that the quality of care received will depend increasingly on the individual's ability to pay.

One example of this trend is the accelerating movement from the traditional U.S. health coverage system of 'defined benefits' (where employers provide a package of defined benefits to their employees) to a system of 'defined contributions' (where employers contribute a set amount and then require employees to decide how much of their health benefit dollars to spend by selecting from a range of benefit plans), which is being driven by employers seeking to limit their exposure to what has become double-digit health insurance premium rate increases. These arrangements represent a fundamental shifting of the financial risk of health coverage from the employer to employees, whereby employers can limit their contributions, while employees must contribute increasing amounts of their own money to pay for health insurance cost increases in attempting to maintain the same level and quality of health care for themselves and their families.

This 'sea-change' in the U.S. Healthcare Delivery System presents both challenges and opportunities for the investment community, based to a great degree on the scope of their understanding of the risks related to these fundamental underlying factors."

For additional information, visit the HCC website library.

Other online resources that may be of interest are listed below.

1. National Center for Policy Analysis Health Care Economics

2. About.com Health Care Economics

3. Council on Health Care Economics and Policy

4. U.S. National Library of Medicine Health Care Economics

Retirement for Three Hundred Million People



According to the Census Bureau, U.S. population now exceeds three hundred million people. In contrast, the headcount was roughly two hundred million in 1968.

Additional numbers are noteworthy. With one birth every seven seconds, a death every thirteen seconds and one net international migration occurring every thirty-one seconds, it's easy to see that population will continue to grow.

Shades of Thomas Malthus, the English economist who warned that more mouths would deplete the available food supply, or an opportunity for innovation due to additional brainpower?

It likely depends on whether you see the glass as half full or half empty. However, one thing is clear. The population is graying at a rapid rate and there is real concern about the economic well-being of seniors who exit the workforce and younger persons who will be called upon to support them.

According to William Poole, president of the Federal Reserve Bank of St. Louis, "Changing demographics make it impossible both to maintain that traditional retirement age, with the level of benefits defined in current law, and to maintain the current level of taxation on the working population to support the retirement system." Global Action on Aging provides a vast collection of country reports about pensions. The message is the same sobering sentiment. Fewer and fewer people are going to have sufficient funds for their later years.

News from the federal front is equally grim. In "Status of the Social Security and Medicare Programs, A Summary of the 2006 Annual Reports", the Social Security and Medicare Boards of Trustees report that "The fundamentals of the financial status of Social Security and Medicare remain problematic under the intermediate economic and demographic assumptions. Social Security's current annual surpluses of tax income over expenditures will soon begin to decline, and will be followed by deficits that begin to grow rapidly toward the end of the next decade as the baby-boom generation retires."

My friends and I have this discussion often. Our conclusions?

1. We will work for a long time, perhaps well beyond the "typical" retirement age.

2. An increasing number of people will move into poverty as national benefits are cut, taxes are raised and private pensions are reduced or terminated altogether.

3. Taxpayers will struggle to fund troubled municipal plans while trying to save for themselves.

4. Fewer companies will offer benefits to new employees, forcing a lifestyle change that requires diminished spending, increased use of debt or both.

5. Health care problems will soon dwarf the pension crisis.

6. There is a perverse incentive for politicians to ignore making unpopular changes that might help in the long-run but hurt voters now. (Besides which, when is the last time a legislator had to worry about his or her retirement account?)

7. Individuals must get smarter and better about taking responsibility for their financial well-being.

8. Effective financial education is paramount.

9. Many individuals favor immediate consumption in lieu of systematic saving.

10. No particular individual or organization seems to "own" the issue.

You get the picture. It's a veritable challenge to be upbeat about what is fast becoming a global retirement crisis.

Is there a sunny side?

Yes but only if one is receptive to making changes. There will be winners and clever investors who identify them early on will do well. Some industries are already showing continued robust growth as our population ages in both absolute and relative terms. Health care is an example. Some see the forced move towards economic individualism as a return to the "get up and go" attitude of our forefathers. (Self-employed persons are already familiar with paying for their own benefits.)

According to an ancient Chinese proverb, "Many grains of sand piled up will make a pagoda."

It's time to get started on a serious savings plan.