LIFE expectancy of 60-year-olds in Australia is increasing at the rate of nine years every half-century, threatening to overwhelm the sustainability of pension schemes and retirement funds, the International Monetary Fund has warned.
The IMF is urging governments to lift the pension age in line with rising longevity and allow retirement funds to reduce retirees' benefits to match the income available.
In an early chapter from its latest Global Financial Stability report, to be released next week, the IMF points out that in just 20 years, life expectancy in the West, including Australia, has risen by three years more than was forecast at the time.
While this "has obvious benefits", the IMF says, it also has less obvious costs and they could be massive.
"Unexpected longevity, while clearly beneficial for individuals and society as a whole, is a financial risk for governments and defined-benefit pension providers, who will have to pay out more in social security benefits and pensions than expected," it warns.
"It may also be a financial risk to individuals, who could run out of retirement resources themselves.
"If individuals [by 2050] live three years longer than expected in line with underestimations in the past the already large costs of ageing could increase by another 50 per cent, representing an additional cost of 50 per cent of GDP in advanced economies."
In Australia, that could mean that by 2050, an average 60-year-old could expect to live into his or her 90s. Back in 1970, men that age were expected to live only to 75.
The cost of public services rises sharply with age. People over 65 occupy half the beds in public hospitals, although they form just an eighth of the population. People aged 75 to 84 visit the doctor three times more than those aged 45 to 54, and run up five times more pharmaceutical bills.
The older people are, the more likely they are to be on the pension and ultimately, in a nursing home.
Official forecasts keep underestimating actual growth in life expectancy because they assume the rapid growth in longevity will level off. But the IMF points out that in fact it never has. Medical advances such as treatments for AIDS and some cancers keep raising life expectancy, even for 80-year-olds.
With the number of retirees now growing rapidly, further rapid growth in longevity could overwhelm public and private retirement funds.
Looking at US pension funds, the IMF found that if life expectancy rises an extra three years, it would increase their liabilities by 9 per cent without a matching rise in assets, capsizing their balance sheets.
It urges governments to:
Lift the pension age to match lifespans, putting a cap on time people spend in retirement. Australia plans to increase the pension age, but only from 65 to 67, and only after 2017.
Give pension and retirement income funds the ability to reduce defined benefits if longevity rises faster than expected. Germany, Japan and other Western countries have already reformed their pension schemes this way.
Introduce mechanisms to allow retirement funds to transfer their "longevity risk" to other financial institutions, as a kind of insurance.
Frequently Asked Questions about this Article…
What warning has the IMF issued about rising life expectancy in Australia?
The International Monetary Fund (IMF) warns that rising life expectancy in Australia — and the West more broadly — is increasing pension and public spending pressures. It says unexpected longevity is a financial risk for governments and defined-benefit pension providers, and could also leave individuals at risk of running out of retirement resources.
How quickly is life expectancy rising for 60-year-olds in Australia?
The article says life expectancy for 60-year-olds in Australia is increasing at about nine years every half-century, meaning people at that age are living substantially longer than past forecasts predicted.
How could longer lifespans affect pension funds and retirement liabilities?
Longer lifespans raise pension liabilities. The IMF found that, for US pension funds, an extra three years of life expectancy would increase liabilities by about 9% without a matching rise in assets. For advanced economies more broadly, unexpectedly longer lives could add the equivalent of roughly 50% of GDP to ageing costs if people live three years longer than expected by 2050.
What impact does ageing have on public healthcare and service costs?
The article highlights that healthcare and public service costs rise sharply with age: people over 65 occupy half the beds in public hospitals while making up about one-eighth of the population, those aged 75–84 visit doctors three times more than 45–54-year-olds, and they incur around five times more pharmaceutical costs.
What policy solutions does the IMF recommend to address longevity risk to pensions?
The IMF recommends measures such as lifting the pension age to match longer lifespans, allowing pension and retirement income funds to reduce defined benefits if longevity rises faster than expected, and introducing mechanisms that let retirement funds transfer 'longevity risk' to other financial institutions as a form of insurance.
Is Australia planning to change the pension age in response to longer lifespans?
Yes. The article notes Australia plans to increase the pension age from 65 to 67, but that change was scheduled to take effect only after 2017.
What does 'transferring longevity risk' mean for retirement funds?
According to the article, transferring longevity risk means allowing retirement funds to shift the financial risk of people living longer than expected to other financial institutions — essentially buying insurance that limits the fund’s exposure if retirees live longer and benefits must be paid for longer.
Could longer life expectancy leave individual retirees short of money in retirement?
Yes. The IMF warns that individuals are at financial risk too: if people live longer than expected they could run out of retirement resources themselves, especially as longer lifespans increase the overall costs of ageing for public and private systems.
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