The Longevity Question | Chief Investment Officer

In his annual letter, BlackRock CEO Larry Fink stressed the need to find solutions to the concerns Americans face when they plan for retirement. “We focus a tremendous amount of energy on helping people live longer lives. But not even a fraction of that effort is spent helping people afford those extra years,” Fink wrote.

Most public pension funds in the U.S. are underfunded, according to research from the Equable Institute, which released a State of Pensions 2023 report that said the average funded ratio for public pension funds was 78.1% at the end of 2023. In the U.S., there are $1.44 trillion in unfunded public pension liabilities, according to the Equable Institute. These pension obligations are the biggest liabilities for state and local governments in the U.S.

Americans are also living longer, and many public pension funds do not have sufficient assets to cover their long-term liabilities Iit may take decades for some funds to reach a fully funded status. Illinois plans for its five state pension systems to be fully funded by 2048, and the California Teachers’ Retirement System, which expects to be fully funded by 2046.

The issue of longevity risk, as highlighted by Fink and by the Equable Insitute’s report stresses the need for pensions to ensure that their funds can meet their long-term liabilities in a time when Americans are living longer than before.

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The life expectancy for adults in the U.S. has risen from age 68.14 in 1950 to 79.2 in 2023, according to the U.N., which projects life expectancy to increase to 88.78 in 2100.

Advancements in medicine, including some ambitious projects seeking to extend the lifespans of humans and other mammals means that life expectancies could continue to increase “Not only are people [in the U.S.] living longer today, but life expectancies are very likely to continue to improve in the future. And so now, at least with public pension plans, it’s routine, that when we are looking at life expectancy, we’re building in an explicit assumption that longevity will continue to improve going forward,” says Rebecca Sielman, principal and consulting actuary at Milliman.

Americans living longer, combined with public pension plans that are underfunded, pose challenges for these allocators.

Adapting to Longevity

Longevity risk, the effects of pension beneficiaries living longer than expected puts pressure on the funded status on a plan and increases contribution rates.

“If on average, members live longer than what is projected by the mortality rates used in the actuarial valuations, the cost of benefits increases. This results in downward pressure on funded status results and upward pressure on contribution rates,” the California Public Employees’ Retirement System wrote in an annual review of risks report.

Longevity is not a major contributor to these unfunded liabilities, says Anthony Randazzo, executive director at the Equable Institute. “When we look at data for the specific causes of today’s $1.4 trillion in unfunded liabilities, demographic factors like retirement patterns and mortality simply are tiny contributors relative to other factors like underperforming investments or contributions being less than interest accruing on the pension debt.”

Randazzo says that longevity risk is more of an issue for funds that have severe underfunding and high levels of negative cash flow, although longevity risk in this situation is still low on a list of worries that a fund would have.

Longevity risk is baked into the calculus of how pension plans calculate liability, Sielman says. “The amounts that plan sponsors are paying into the pension plans are higher as a result, so they’re setting aside more money now, knowing that people are going to be living longer and collecting more benefits in the decades to come.”

Professor Gordon L. Clark of Oxford University says that defined benefit plans should “look at a much broader set of asset classes and a much broader set of investment instruments.”

One effect of longevity risk is that funds might allocate more to higher-risk asset classes, like some alternatives. Public DB plans with higher longevity risk may tend to allocate more to risky asset classes, according to a paper from LGIM.

criticized pension funds for increasing allocations to riskier asset classes. “In order to achieve high returns, pension funds have accumulated a large exposure to risky assets, which results in volatility and a large dispersion in possible future investment returns,” the paper stated.

A spokesperson for BlackRock suggests that public pension funds facing longevity risk could consider increasing their allocations to fixed income assets, due to the current higher interest rate environment.

Longevity Pharmaceuticals

Modern medicine has contributed to the steep increase in human longevity over the last century, however, some researchers and practitioners believe human longevity can be extended even further. A number of researchers are exploring pharmaceuticals that promise to extend the lifespans of animals, and later humans.

One such company is Loyal, a startup that aims to achieve regulatory approval for its medication that aims to increase the lifespan of larger dogs. The company has begun its clinical trials, called and expects to offer

David Sinclair, a researcher at Harvard Medical School whose lab had reversed aging in mice and is now working on the technology in primates, suggests that the human lifespan can be increased to 150 years in the long term.

While living to 150 may be a stretch, the possibility that more Americans could live lives far out into their 100s is not zero, and a future that many public pension funds should anticipate, even if it takes a century to get to that point. While pension funds do think about longevity risk, extensive longevity promised by speculative technology is not baked into how these pensions approach risk.

“There are certainly a number of promising medical advances that could lead to a rapid increase in human life spans. How quickly those breakthroughs come—and how available they will be to individuals outside the top ends of the socioeconomic ladder—are speculative enough at this point that no pension fund is overly concerned with trying to design an adaptation just yet,” Randazzo says.

Working Past 65 Redefines Portfolios and Retirement

Tags: Anthony Randazzo, Asset Owners, Equable, Gordon Clark, Larry Fink, longevity, Pensions, public pensions, Rebecca Sielman

The enormous Baby Boomer generation, oft-described as a swallowed pig moving through a python, could harm investment markets as they cash out shares and bonds to fund their retirement. The same concern extends to the residential real estate market—as they downsize their homes.

How big a threat is this to institutional investors, which depend on these traditional asset classes to provide for pension beneficiaries and meet other obligations?

By 2040, the number of people older than 65 in the U.S. is expected to increase to almost 21.6% of the country’s population, up from about 16% in 2018, per the U.S. Administration on Aging. With the aging of America, people over 70 now own the most stocks and mutual funds, 33% as of 2021, versus 22% in 2006, Federal Reserve stats show.

The International Monetary Fund described an unpleasant scenario of an aging population in a 2014 paper: “As retirement approaches, individuals become less willing to tolerate investment risks, so they begin to sell off stocks. Thus, the aging of the Baby Boomers and the broader shift of age distribution in the population should have a negative effect on capital markets.” Over the past 10 years, however, that did not happen.

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What about the next 10 years or more? The dire Boomer cash-out scenario strikes a number of strategists as implausible. “They’ll take the money out gradually,” says Salvatore Capizzi, executive vice president at investment advisory firm Dunham & Associates Investment Counsel. In the late 1980s, “when I got started, we expected people to live until 80. They live a lot longer now. If you retire now at 65, you have another 40 years, another lifetime.”

Encouragingly, there are enough younger folks to possibly offset any Boomer cash-outs. The two generations behind the Boomers are not small and, if history is any guide, those groups will increasingly buy securities and housing, Capizzi argues.

Baby Boomers (born between 1946 and 1964) constitute 20.6% of the population, while Generation X (1965-1980) is not far behind at 19.6% and millennials (1981-1996) are ahead with 21.7%, according to Statista. Just coming into adulthood, Generation Z (1997-2012) is also a slightly larger cohort than Boomers.

Another factor is the ongoing influx of immigrants. “Immigration has always been one of the engines of growth,” says Luca Paolini, chief strategist at Pictet Asset Management.

It helps that immigrants often are younger than Americans born in this country, thus the newcomers are more likely to start businesses—and invest in securities and real estate. “One offset to an aging population could be increased immigration, especially of younger people,” notes Bob Jacksha, CIO at New Mexico Educational Retirement Board. But he adds that immigration lately is a fraught political topic, and so “the future of that factor is quite difficult to gauge.”

Immigrants often have more children than the native-born, according to the Center for Immigration Studies, and that’s a net-net advantage for the U.S. Thus, as Seamus Smyth, chief economist at Virtus Investment Partners, points out, “The U.S. has higher fertility and more immigration” than elsewhere in the West.

Demographics have the potential to affect different asset classes differently. Some of those changes are as follows:

Stocks

To Larry Kochard, co-CIO, Makena Capital Management, “Because people are living into their 90s,” they are more open to hanging onto stocks in later years. “Stocks give the best performance and are the best at countering inflation.”

Over the past five years, the S&P 500 has increased 73%, and in the past 12 months has climbed 28%. The Consumer Price Index was up 3.5% for the 12-month period. At the same time, foreign purchases of U.S. stocks have remained vigorous, although down a bit lately due to the strong dollar, which makes them more expensive than most overseas issues.

The aging of the population also presents opportunities for investors who are not in or close to retirement, as well as Boomers, obviously. Health care industry stocks, which rose 9% annually over the past five years, and artificial intelligence, up 6.3%, are good equity sectors to be in, said a report by Goldman Sachs Asset Management.

Health care stocks, of course, are propelled by an aging population—which uses more health care goods and services than do younger cohorts—and advances in medicine. AI companies benefit from the technology’s prospect of running much of the world in the future.

AI also could have profound workforce implications, as it could automate up to a quarter of all U.S. jobs by 2034, although ultimately this trend would boost economic growth by 0.4% due to greater efficiency, per another Goldman report. Meantime, services often used by older adults, such as assisted living facilities and travel, seem obvious investment choices as populations age.

In emerging markets, stocks show a lot of promise because EM populations are younger than in developed countries, which should help these economies grow, and provide a ready cohort to bid up share prices. For U.S. investors, places such as Turkey (its stock index doubled over the past 12 months) and India (up 22%) could be good places to invest, Goldman advised.

Goldman contended that up-and-coming EMs “offer attractive diversification opportunities for investors exposed to aging population dynamics,” meaning institutional investors in search of good returns should flock to them—something they have not done thus far. EM assets are just 5% of U.S. public pension plans, far down from the 11% weighting in the MSCI All Country World Index.

Market growth does have its limits for older investors, though. The problem is that many of the elderly have little money—10% of those 65-plus are below the poverty line—so stock-centric assets likely won’t end up being a boon for all older Americans.

Bonds

To Goldman, bonds will fluctuate as different cohorts grow older. In the U.S., the wave of Baby Boomer retirements indicates potentially higher long-term yields over the next 10 to15 years. And that is not good news for bond prices, which move in the opposite direction.

Reason: Fewer Boomers will be buying bonds, in coming years, as they already have enough. Once younger generations start purchasing bonds, they “could exert downward pressure on the 10-year Treasury yield by 2050,” Goldman projected. But then, “rates could rise again in the second half of the century as millennials retire.”

Housing

N. Gregory Mankiw, a Harvard economics professor, famously predicted in a 1989 paper that the giant Baby Boomer generation would inflate the housing market, and the converse would occur when they retired and sold their homes. Hence, housing would lose value.

For allocators that invest in housing via mortgage-backed securities, any downturn in value would not help MBS pricing. On the other hand, risks of MBS default remain low as government-sponsored agencies such as Fannie Mae issue almost all of those securities.

But a Boomer housing retreat is not what is taking place. A large majority of Boomers (78%) said they want to stay in their current homes, according to a recent survey by real estate brokerage Redfin. Says Virtus’ Smyth, “Mankiw was wrong.”

Why move? Home prices are very high, partly thanks to a supply constraint: Less housing got built after the shock of the global financial crisis, which was propelled by an over-supply of residential real estate, and by the debt used to buy it. The National Association of Home Builders/Wells Fargo Housing Market Index plunged from right before the 2008 crisis, then gradually recovered until the pandemic hit in 2020. Over the past four years, it is off about 40%.

Adding impetus for Boomers to stay where they are: rising mortgage rates, linked to the Federal Reserve’s tightening campaign starting in March 2022. The average 30-year mortgage rate has more than doubled since then, to 7.17%.

More broadly, the prospect of swelling retirement ranks has spurred questions about how society can pay for all the Boomers, whether via Social Security, whose trust fund is dwindling, or public pension plans, many of them underfunded. A lot of Americans have not saved enough for retirement.

One move aimed at easing this burden that has gotten a lot of attention: A suggestion from Larry Fink, CEO of BlackRock, that the official retirement age be increased, thus lessening the strain on Social Security. At the same time, such a move potentially would raise the age at which Americans must start drawing down their tax-deferred retirement accounts, giving them more time to expand their nest eggs. The implications for public pensions would be unclear, as their benefits often are mandated by law.

For allocators, today’s retirees and tomorrow’s, the stakes are immense. Demographics, the saying goes, is destiny. For investors, it’s a huge influence to watch.

Longer Life Expectancy Puts Pressure on Global Pension Systems

Tags: aging, baby boomers stocks, Bob Jacksha, Bonds, demographics, Goldman Sachs, Gregory Mankiw, Housing, Larry Kochard, Retirement