Pension funds have not done a good job factoring increased life expectancy.
Take the teachers’ retirement system, which only changed mortality assumptions a few years ago as part of a long-term bailout that requires greater contributions from teachers, school districts and the state.
“Historically, CalSTRS—like most pension systems—has used static assumptions about life expectancy. This means that the assumptions did not change over time to reflect anticipated future improvements in life expectancy,” wrote the Legislative Analyst’s Office.
Currently, CalSTRS assumes that a female teacher will live until 89 and a male teacher until 87. But the system found it should be using more conservative assumptions.
A female teacher who retired in 2016 can expect to live past 90, at least six years longer than the average California woman. And a male teacher who retires the same year can expect to live nearly 88, nine years longer than the average California male.
By 2046, a female teacher can expect to live until nearly 93 and a male teachers past 90.
CalPERS, in November of 2017, made adjustments for longer life expectancy. Instead of updating static tables every four years that make fixed projections of life expectancy, CalPERS has moved to a model that approximates generational mortality assumptions, which reflect continual expected improvements in life expectancies.*
The workforce is also aging, which means pension funds are distributing more benefits than ever before.
According to the state controller’s office, there were 3.2 active workers for each retiree in 2002. In 2015, there were fewer than 2 active workers for each retiree. The trend is expected to continue as Baby Boomers move further into retirement.
The situation is more acute at some pension systems. CalPERS, for example, forecasts its ratio of active workers to retirees will fall below 1-to-1 in the next five years.
* This description was added for clarity 4/5/18