Social Security retirement age should be raised to 70 or older, said the two keynote speakers at Pensions & Investments' Investment Innovation and the Global Future of Retirement conference.
Robert Merton, Nobel laureate in economic sciences and finance professor at MIT Sloan School of Management endorsed the basic idea and said monetary policies have negative effects on retirement funding.
L. Stephen Coles, executive director of Los Angeles Gerontology Research Group, said people at the age of 65 will have on average another 15 to 22 years of future retirement, and those at 80 will have another seven to 10 years. The percentages of both age groups are increasing around the world, which has serious social and economic impact in developed countries.
The U.S. is expected to have 16.6% of its total population over the age of 65 by 2020, up from 12.5% in 2000, Mr. Coles said.
Because of changes in savings rates, trillions of dollars are at stake, Mr. Coles said. He added that the Social Security retirement age should go up to 70 or older to keep the trust fund solvent.
“If we mechanically move the retirement age, you change the distribution significantly, because some lower-income individuals do not live as long,” Mr. Merton said.
Later in the session, Mr. Merton said current monetary policies have a greater negative impact on defined contribution plans than defined benefit plans.
When interest rates are low, retirement gets really expensive, Mr. Merton said. For example, a 45-year-old has to pay 111% more for his annuity if interest rates are 1.5% instead of 4.13%, the high point for the 30-year U.S. Treasury note.
Mr. Merton said there is a notion that there is a stream of income in DB retirement savings, but in the DC world, it is a “la la land.” He said there needs to be focus on income rather than creating wealth.
Mr. Merton said that U.S. Treasury bills are very risky in preserving income.
The discount rate of annuities varies over time, which causes the cost of income replacement to vary significantly, while after purchasing an annuity, income volatility falls to zero.
The volatility of annuity prices is a high risk when measured in terms of asset value, but it is a minimum risk when measured in terms of income, Mr. Merton said.
The 30-year Treasury inflation-protected yields have plunged more than 1 percentage point between 2007 and 2014.
Mr. Merton said the reason for the shift to DC from DB is that it is too expensive for the employer to keep pension plans. Therefore, people cannot expect the same level of income, which means more savings into retirement plans.
“There is going to have to be a takeup,” Mr. Merton said. Old annuity products are not a great judge of future products, he added.