If we all live to 100, a scenario recently posed by The Atlantic, states and districts would likely face higher retirement costs in pension benefits, at least under current practices. But longer life expectancies could also open the door to policies that encourage work at older ages.
Longer worker life expectancies mean more pension payments from employers who promise benefits over a worker’s lifetime. When the Society of Actuaries updated their mortality assumptions, commonly used by pension plans to estimate future payments, they anticipated that pensions could expect up to a 7 or 8 percent increase in liabilities. This estimate is based primarily upon private plans, but teacher pension plans, which are made up of predominately female members (who tend to live longer), would also be impacted by an aging workforce.
Currently, teacher pension plans have relatively low retirement ages, encouraging teachers to spend more years in retirement and consequently draw more pensions payments. The median retirement age for a public school teacher is 58 years, compared to 62 years for the labor force as a whole. Meanwhile, pensions are structured to push out aging teachers by decreasing their overall pension wealth; every year that a teacher teaches beyond the normal retirement age is a year she forfeits pension payments. Traditional pensions basically encourage retirement at these earlier ages while punishing work at older ages.
There’s also a significant delay between actual trends in the workforce and when pension plans update their mortality assumptions. The mortality table preceding the most recent Society of Actuaries release was based on data collected from over 20 years ago. Actual life expectancies have risen considerably even in the last 20 years.
In the federal government, Social Security’s original retirement age of 65 was updated almost half a century after the initial act was passed (prompted mainly because of fiscal reasons). When Social Security benefits were first paid in 1940, the life expectancy for a male at age 65 was 78. It was 80 for a female. By the 1980s, the life expectancy for men increased by almost 2 years and over 4 years for women, where a women at age 65 was expected to live until age 84. Today, the Social Security Administration estimates that the life expectancy is 84 for a 65-year-old male and close to 87 for a 65-year-old female.
Policies like Social Security’s delayed retirement credit reward individuals who retire later with an increased percentage of benefits and encourage workers to work for more years. Some states also offer deferred retirement plans called DROP plans: teachers can “freeze” their pensions when they reach the normal retirement age. Instead of retiring, they can continue teaching and accumulate a separate DROP account of retirement benefits; or already retired teachers can return to the workforce without forfeiting their pensions. Rather than discouraging work at older ages, states can enact policies that will encourage workers to continue working for longer. The teaching workforce could benefit from the insights of veteran teachers, or second-career teachers who switched to teaching at a relatively older age.
There are mixed schools of thought on how much more life expectancy will continue to rise, and life expectancy itself varies by income. But even if we don’t all live to 100, the key takeaway for policymakers is that we still need to update our policies not just for the present workforce, but also the future one, and do so in a way that anticipates and rewards work at older ages.