The good news for low income workers is that they may not have the big retirement savings challenge they’ve been worried about. There is bad news, however.
A new report by the Government Accountability Office (GAO) notes that life expectancy varies substantially across different groups with significant effects on retirement resources, especially for those with low incomes. For example, according to studies GAO reviewed, lower-income men approaching retirement live, on average, 3.6 to 12.7 fewer years than higher-income men.
In response to the request from GAO developed hypothetical scenarios to calculate the projected amount of lifetime Social Security retirement benefits received, on average, for men with different income levels born in the same year. In these scenarios, GAO compared projected benefits based on each income groups’ shorter or longer life expectancy with projected benefits based on average life expectancy, and found that lower-income groups’ shorter-than-average life expectancy reduced their projected lifetime benefits by as much as 11% to 14%, raising questions as to how specific solutions designed to extend the sustainability of programs like Social Security, notably raising the minimum age for benefits, might impact lower income workers, for whom Social Security is their primary source of retirement income.
Retirement Planning Challenge
Of course, a key reason that individuals face challenges in planning for retirement is that many people do not understand their life expectancy, the number of years they will likely spend in retirement, or the amount they should save to support their retirement. GAO notes that a survey conducted by the Society of Actuaries showed that there is a greater tendency for retired respondents to underestimate rather than overestimate their life expectancy, and that older workers tend to retire sooner than they expected. Coupled with increasing life expectancy, this means they will likely spend more years in retirement than anticipated.
GAO notes that women are particularly at risk of outliving their savings because they live longer, on average, than men, although the gap between the sexes is diminishing. The report explains that women age 65 and over have less retirement income, on average, and live in higher rates of poverty than men in that age group.
The report notes that, while there are many factors at play in the decline of defined benefit (DB) plans, increasing life expectancy adds to the challenges these plans face by increasing the financial obligations needed to make promised payments for their beneficiaries’ lifetimes. GAO notes that plan sponsors and industry experts estimate that the Society of Actuaries’ 2014 revised mortality tables, if adopted for DB plans, would increase plan obligations by 3.4% to 10%, depending on the characteristics of a plan’s participants. The report notes that DB plan sponsors have increasingly been taking steps, known as “de-risking,” to either reduce risk or shift risk away from sponsors, often to participants.
Ultimately, GAO, which makes no recommendations in this report, notes the trend toward increasing life expectancy may mean that more individuals outlive their savings, with only their Social Security benefits to rely on.
