With the collapse in the global stock markets, many investors staring at the wreckage of their 401(k) plans and their declining savings and concerned about the viability of their defined benefit plans are quietly postponing their retirement dreams. In the midst of all this bad news there might be a silver lining for participants and pension plan sponsors. Some scientific data suggest that the later a person retires the longer they will live.
While some workers might welcome the opportunity to live to see their children happily married or their grandchildren graduate, others may only see the extra drudgery of longer employment. It may be some consolation to those of us who delay retirement to remember that the actions of optimistic folk who are dying to retire early actually translates into retiring to die early.
The scientific basis for the theory is largely rooted in a study co-authored by Shan P. Tsai, manager, epidemiology of Shell Health Services of Shell Oil Co.* The study, titled Age at retirement and long term survival of an industrial population, was published Oct. 21, 2005, in BJM, a publication of the British Medical Association. The study looked at Shell employees who retired at age 55, 60 and 65, between 1973 and 2003. It covered approximately 3,500 people over the 30-year period. Basically, the mortality rate of those who retired at 55 (adjusted for health factors) was twice that of their still-working colleagues. The mortality rate was not gender neutral however. The study found the early deaths are 80% more likely to happen to men. Further, Shell could not identify any specific causes for these observable facts.
From the pension plan funding standpoint, these findings offer some perverse conclusions. An earlier start date for a pension payout schedule might suggest more payments overall and higher pension costs over the life of a retiree but the study found the opposite result. The early retirement of a 55-year-old worker is actually cheaper for the fund. Costs are lower because early retirement means a lower monthly pension payout (as a result of shorter tenure) and fewer payments overall (as a result of early death). Conversely, the same 55-year-old worker delaying retirement for five more years and thereby cutting his mortality rate by 50% will not only live longer, but also do so at a full pension.
Because of the extra expense of full pension obligations, pension plans will necessarily require a larger pool of assets. However, plans will then have at least five more years of potential investment growth to offset the increase in each retirees cost. This delay will also reduce immediate liquidity needs. But whether it will be more expensive, cost neutral, or actually lessen the funding burden is subject to the success of the investment strategy employed. Right now, the investment return outlook for any asset class over the next five years does not inspire confidence, so we can expect actuaries to require higher funding levels.
If the theory is valid, this will require a major rethinking of everyones career aspirations. Early retirement has long been the holy grail of many workers looking forward to a lengthy, contented and low-stress lifestyle in their twilight years. If the new theory is widely accepted, many men may prefer to work longer and live longer which will also give them more time to build a larger retirement nest egg. Later retirement may be more palatable to workers who already are aware that life spans have been significantly extended by better health practices and that a longer working career will become increasingly normal.