Longevity Assumptions Affect Pension Funding

Commentary

Longevity Assumptions Affect Pension Funding

Accurate estimates of lifespans play an important role in pension funding. As longer lifespans mean larger pension benefits, underestimation of workers’ life expectancy may cause insufficient funding. For example, a revision of longevity assumptions in 2014 reduced CalPERS’s funded ratio by five percentage points. A recent study by Alicia Munnell and others at the Center for State and Local Government Excellence explores the funding challenges faced by public pensions due to longevity improvement.

Using data from 150 state and local pension plans, the study analyzes how differences in life expectancy affect public plans’ funded status. It finds that if public plans adopted the new mortality table that private plans are legally required to use, the public plans’ estimated life expectancy would increase by 0.5 years, decreasing the average funded ratio from 73 percent to 72 percent. However, if public plans used the generational method, which incorporates anticipated future longevity improvements, the life expectancy increase would be 2.3 years, dropping the funded ratio to 67 percent.

Additionally, the analysis reveals that using the new mortality data causes the biggest decline in funded ratios for the smallest plans, and that worse funded plans tend to use more outdated longevity assumptions.

To read the full study, go here.

Truong Bui is a policy analyst at Reason Foundation, where he works on the Pension Integrity Project.