A sobering report from the IMF finds that the U.S. government may be underestimating the life expectancy of its aging population by as much as three years. This means Social Security, Medicare, and Medicaid, which are already buckling under the strain of the Boomers’ looming retirements, are even closer than we thought to collapse if not reformed.Pension plans of both the public and private variety are facing similar problems. The Wall Street Journal reports that this longevity miscalculation could lead to errors of $175 billion per year in future cost calculations, adding up to $7 trillion over the next 40 years. These numbers add up quickly, and the longer we wait, the harder the problem will be to address. The IMF report urges governments to pressure pension plans to get their facts in order:
Besides largely ignoring longevity risk, the IMF says one of the major problems is the use of outdated data on life expectancy. For example, a study of U.S. Department of Labor statistics found that until recently, a majority of pension plans used mortality rates dating to 1983. But in the quarter century since then, medical advances have pushed back the average schedule for death. Using the three-year error rule, that may mean many U.S. pension plans could be facing liabilities 9% higher than budgeted.
Will dire news like this finally galvanize the political establishment to take on entitlement reform? Thus far, neither party seems to be close to a credible plan to do so, although there are some signs that politicians are beginning at least to face the issue squarely.The longer we wait, the more painful the inevitable changes will be.