While financial challenges of aging may seem like a standalone issue, a closer look reveals that other dramatic shifts are collectively impacting it and other actuarial areas. This underscores the need for actuaries across all fields to collaborate, understand each other’s coverage areas, and ensure potential reforms lead to systemwide improvements.
By Noah Kirsch
America’s demographics are rapidly changing. One out of six citizens is now at least 65 years old; a century ago, that figure was one in 20, according to census data. Meanwhile, Americans are living much longer—a testament to improved technology and health care access, but a financial strain on the country’s social safety net programs. Unless policy changes are made, the Social Security Administration forecasts that its trust fund reserves will be depleted within a decade. Likewise, proposed cuts to Medicare, Medicaid, and other entitlement programs are part of perennial conversations in Washington, D.C.
These changes are unfolding as many aging Americans are struggling to prepare for their golden years. Roughly a third of the population is not saving anything for retirement, says Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University’s McCourt School of Public Policy. Simultaneously, roughly a quarter of people over 65 years old rely on Social Security payments for at least 90% of their annual income.
The financial pressure on aging Americans comes amid other dramatic shifts. Climate change, for instance, has greatly increased the intensity of wildfires in the United States, driving up the cost of property and casualty insurance.
Collectively, these trends will impact all areas of the actuarial field—life insurance, health insurance, property and casualty, and retirement. Affordability issues in one sector may make it difficult for a customer to purchase insurance or financial products in another sector, says Geralyn Trujillo, senior director of public policy at the American Academy of Actuaries. Moreover, some new trends are impacting multiple parts of the field at once. For example, natural disasters like wildfires don’t just influence property insurance rates, but they can also impact a person’s health, which may affect forecasts for the Medicare program.
Actuaries, therefore, need to collaborate to understand the bigger picture, Trujillo says. “We’re focusing on various issues impacting specific practice areas, but we recognize the need to have multiple conversations that pull every practice area together, so that as a profession we understand how this all really does work together.”
Donna Megregian, chair of the Academy’s Life Products Committee, adds, “Every practice area contributes to retirement savings and being aware of options that are available is beneficial to a client and consumer for them to be better prepared for retirement. If people are concerned about the availability of public systems to support them, there ought to be a push to help plan for how the private sector is filling the gaps.”
Retirement Savings
In recent decades, the systems helping American workers prepare for retirement have evolved dramatically. Many employers have shifted away from defined benefit plans, such as pensions, putting the onus on individual employees to stow money away, whether as offered by employers or through more personal efforts.
Employer-sponsored plans continue to incentivize savings, however. Antonelli notes that individuals with access to such programs are 15 times more likely to save for retirement. Claire Wolkoff, MAAA, FSA, former chair of the Academy’s Retirement Policy and Design Evaluation Committee, says that access to employer-sponsored plans varies based on an individual’s type of work, among other factors. Union workers, for example, have higher rates of access and participation, as do full-time employees, those in the highest income brackets, and those at large firms. Savings rates also vary demographically, she says, though the gaps narrow once employees participate.
Wolkoff says, “Surveys show [that] if an employer offers a retirement plan, people are more likely to participate and save.”
However, experts consulted by Contingencies caution that a substantial portion of the population remains unprepared for retirement.
The lower 40% of the population approaches retirement with net assets of zero or below zero, says Josh Hodges, chief customer officer at the National Council on Aging. In other words: Even if the upper echelons of the savings bracket are improving their financial positions, “we’re seeing this broader dichotomy, or bimodal distribution, of wealth and financial security.”
Roughly six out of 10 people are retiring sooner than they planned, says Catherine Collinson, president of Transamerica Institute. Most of those early retirees aren’t doing so by choice, but rather because they are aging out of their jobs or are “forced into retirement one way or another.”
The median retirement age of those surveyed by Transamerica Institute was 62, costing those workers “five or 10 years at the end of their careers in lost time for their savings and investments to grow,” Collinson says. Early exits from the workforce also cost these individuals years of additional income and force them to draw on their savings earlier than planned.
Meanwhile, according to Transamerica Institute surveys, almost 40% of employed workers say they “have a side hustle to bring in extra income,” which might include gig economy jobs such as working as an Uber driver. Some are simply stockpiling extra cash, but full-time independent contractors may have less access to savings plans, employer-matched retirement programs, and other benefits.
The gig economy may have other unintended consequences. Those pressured to take on a second job might struggle to afford essential insurance products or experience mental and physical strain from financial stress, potentially leading to higher health care costs and other effects.
Some state governments are working to fill the gaps. So far, 20 states have begun offering (or will soon offer) state-facilitated retirement savings accounts, Antonelli says. “They’re telling employers you have to take action. You either have to adopt an employer-sponsored plan [if one isn’t already offered], or, at a minimum, facilitate the ability of your workers to be auto-enrolled and to start saving for retirement,” she says. Workers can always opt out, though.
State programs will soon reach $2 billion in assets saved for retirement and a million funded saver accounts, Antonelli says, adding that, “I’m incredibly optimistic.”
Other initiatives are in the works as well. Cheryl Evans, director of the Lifetime Financial Security Program at the Milken Institute, says that her team encourages employers to offer an “annuity-like product” within 401(k) plans, which can offer guaranteed lifetime income down the road.
Wolkoff adds that the SECURE 2.O Act, enacted in 2022, allowed for the establishment of emergency savings accounts within 401(k) plans, which would enable individuals to set money aside for unexpected short-term expenditures. Employers can also match contributions. These kinds of initiatives, in turn, can help lower-income Americans begin saving for retirement. Once the emergency funds reach a certain threshold, “the contributions switch over to long-term savings,” Wolkoff says.
Evans says financial innovations can help assuage individuals’ anxieties. For most people, outliving one’s money is “a bigger fear than death,” she says.
Megregian notes that one mitigation technique for outliving your savings is leveraging inflation adjustment on life insurance annuity products. Although it is more expensive to pay for that adjustment, it can help protect against inflation.
Thankfully for many aging Americans without substantial independent savings, Social Security checks can help make ends meet. Still, many experts worry that the Social Security trust fund’s reserves are expected to run out in 2034, as the Social Security Administration forecasted in its 2023 report, “Will Social Security Be There for Me?”
“We’re still operating under the rate setting that was done in 1983,” says Dan Doonan, executive director of the National Institute on Retirement Security.
Sam Gutterman, chair of the Academy’s Social Security Committee, says, “Right now, I’m pessimistic because no one’s talking about this. It’s less than 10 years away.”
Without replenishment, social security payments wouldn’t end immediately in 2034, however. Federal taxes would still allow the government to dole out approximately 80% of planned benefits, but experts say that such a dramatic cut would be unlikely.
Don’t forget about the protection gap—that space between being uninsured and underinsured, Megregian says. Many don’t have or have enough insurance, especially life insurance. The risk of losing a salary too early greatly impacts the ability for the remaining family to save. Of all the insurances, life and annuity products likely don’t get enough attention of their contributions to preparing for retirement because they are neither compulsory or government funded. According to LIMRA’s 2021 Insurance Barometer Study, 40% of Americans are insufficient in their life insurance needs—that’s 120 million consumers who will be impaired in their financial situation and further hindered in their ability to save for retirement. This gap is higher for women than men, as women tend to live longer, making it easier to outlive incomes without proper preparation.
Andrew Biggs, a senior fellow at the American Enterprise Institute and a former associate director of the White House National Economic Council, points out that aging Americans vote at higher rates than younger Americans, and politicians would be reluctant to allow benefits to be slashed so drastically overnight. Regardless, the potential for fewer benefits being fulfilled, when Social Security is already being deemed insufficient to fund retirement, is a concern that requires attention.
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The Impact of AI
Rapid technological change, such as the emergence of artificial intelligence (AI), will impact nearly every industry, and the actuarial field is no exception. Already, AI is being tested to calculate premium costs or evaluate risk in the property and casualty space, says Geralyn Trujillo, senior director of public policy at the American Academy of Actuaries. It is also being deployed—or considered for use—in health care to help diagnose illnesses, collect claims data, and identify trends about health care expenditures. The concern, of course, is that the data used to train AI models should be both high quality and free of bias, she says. A consumer looking to buy insurance should not face discrimination on the basis of an algorithm that may not be using credible data or experience. As the technology continues to rapidly evolve, it requires continuous vigilance and attention from actuaries, technologists, policy makers, and corporate leaders.
“AI and data bias have implications for all practice areas,” Trujillo says. “The challenge for public policy and actuaries is understanding that the emerging issues can be really broad, but the way we talk about them is very nuanced. Important details might be missed in an area simply because we aren’t actively paying enough attention.”
Josh Hodges, chief customer officer at the National Council on Aging, notes that AI may affect consumers in other ways—with seniors among the most vulnerable. AI-generated videos, known as “deep fakes,” can make it easier to scam older adults, as one example. Scammers have become sophisticated at utilizing “extremely complex IT systems,” he says. They have also refined their techniques, such as defrauding elderly targets by mimicking their family members or engaging in “romance scams.”
On a positive note, technological change may yield positive benefits in other unexpected ways, says Steve Malerich, chair of the Academy’s Risk Management and Financial Reporting Council. For instance, developments in robotics could potentially fill the likely shortage of caretakers for older adults, he says, assuming those innovations are combined and accepted by society. That might sound like science fiction, but “if I get comfortable relating to C-3PO, or C-3PO can take care of me when I’m old, OK, great,” Malerich says, referring to the humanoid droid from the Star Wars films. Still, that may be many years away.
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Health Care Costs
Social Security payments now equate to more than 5% of the United States gross domestic product—a “huge” percentage, Gutterman says—though less than a third of what the country spends on health care. Federal health insurance programs, particularly Medicare and Medicaid, face the same financial pressures caused by America’s aging population, longer lifespans, and general cost increases.
Mick Diede,chair of the Academy’s Health Care Delivery Committee, says Medicare and Medicaid expenditures are outpacing inflation. Expenses on the two programs rose about 8% in 2023 alone; each now accounts for about a fifth of all national health expenditures (inflation in 2023 was about 3.4%, as measured by the Consumer Price Index). Prescription drug prices remain an intractable problem, while new technologies like genetic testing and specialized medications are enormously costly, despite their benefit to patients.
Additionally, coverage gaps remain. “There’s always a kind of a joke in our space that the first time you learn Medicare doesn’t cover long-term care is the second you need long-term care covered by Medicare,” says Hodges of the National Council on Aging. Many retirees also mistakenly believe that Medicare is entirely free, he adds, when in reality, premiums often cost hundreds of dollars per month.
Programs exist for low-income individuals, Hodges says, “but if you’re in the slightly-above poverty level, many of those programs aren’t there for you. And so people are spending a lot more on their health insurance than they’re expecting to.”
Dawn Carpenter, director of Financial Longevity at Milken Institute Health, says that the average couple will incur approximately $300,000 in out-of-pocket health care costs during retirement. The link between a person’s financial stability and their health works both ways, she says. When someone gets sick, they are more likely to deplete their savings, and if they are already in a precarious financial condition, they are less able to tend to their health.
Much like with retirement, some states are working to step in where needed, says Seong-min Eom, who chairs the Academy’s Longevity Risk (E/A) Subgroup. As one example, some governments are working on long-term care programs. The problem is these initiatives are extremely expensive and will require actuaries to step in to correctly project funding needs, she says.
States are working to tackle other sources of financial strain that require actuarial attention, too, says Eom, who also chairs the Academy’s Climate Change Joint Committee. For instance, climate change has increased the severity of wildfires in California, which has pushed up the cost of property and casualty insurance for many consumers and, in many cases, caused insurance companies to withdraw coverage altogether, according to an article, “California Sees Two More Property Insurers Withdraw From Market” inInsurance Journal.
In California, Eom says, officials are allowing companies to model extreme climate events and charge consumers premiums commensurate with that risk. Previous regulations prevented them from doing so in some cases, she says. While this might lead to higher prices, it would at least discourage insurers from leaving the state altogether. Similar issues are playing out in Florida, where floods and hurricanes are straining both private and publicly funded insurance markets.
Other forces are pushing up homeowner insurance rates, too, Gutterman says. Home repair costs are rising, driven by supply-chain shortages and inflation. Moreover, “if we get more trade wars, you’re going to have the cost of wood and housing replacement” increase further. All of that is happening while a housing shortage is already pushing many people out of the market, he says.
For many Americans, particularly the financially vulnerable, financial pressures require difficult choices. In extreme cases, that might be cutting back or eliminating needed financial purchases—or even cutting back on food.
If a person lives in an area that was flooded, and their insurance rates skyrocket, that “does not mean their payroll doubles,” Eom says. That doesn’t even account for other sudden expenses. It is not difficult to imagine a scenario where a natural disaster causes a person to become sick, or potentially affects many people at once, Eom continues. That would place a strain on several insurance markets simultaneously. “Affordability is not only limited to one area,” she says. “You have to understand the interconnections.”
Connecting the Dots
As Eom identifies, emerging trends within the actuarial landscape may seem like disparate issues, but many of the previously mentioned phenomena are intertwined or, at a minimum, may affect different parts of the field at the same time.
For instance, Gutterman says, longer lifespans in the United States would obviously affect annuity products that provide recurring payments over a person’s lifetime. At the same time, they would affect life insurance forecasts differently, as well as Social Security needs and health care cost expectations.
This blending of practice areas is something that resonates across the board. Megregian notes that many life insurance and annuity products offer access to cash value that can help when financial stress occurs. These products also provide living benefits such as long-term care, critical illness or chronic illness benefits that pay in situations when large financial losses can occur. “It’s the combination of products and services that will help people become more prepared for retirement. Starting early is so vital,” says Megregian.
Trujillo offers another anecdote. “When you talk about pension risk transfers, employers are looking at their risk profile and are looking to shift from a more traditional defined benefit program to a different opportunity for their employees. Sometimes that means a lump-sum payment, while other times it’s a transition to an annuity product.” Traditionally, a defined benefit plan would fall under the retirement umbrella, whereas annuities would fall within life insurance. “So, the two practice areas need to be able to communicate, understand the respective risks and opportunities, and work collaboratively with regulators,” she says.
These types of relationships are unfolding across the industry, including interconnectedness between retirement and health. Each year, the Social Security Administration and the Centers for Medicare & Medicaid Services release trust fund reports about the sustainability of their respective programs. Often, they are viewed individually, and policy proposals are sometimes floated on Capitol Hill to tax one program in order to boost another. Trujillo sees that kind of approach as “robbing Peter to pay Paul,” since Medicare and Social Security, for example, are intended to serve the same population of Americans. It would make little sense to try “to help them on one side by hurting them on the other.”
The list continues, she explains. Broadly, in the current climate, actuaries must collaborate to understand each other’s coverage areas and to ensure that potential reforms lead to improvements for the entire system.
The crucial question, Trujillo says, is how to “do a better job of ensuring that everyone has appropriate access to the products or the services that they need at a cost that they can afford,” while also keeping it sustainable for companies and beneficial for the broader economy.
Noah Kirsch is a freelance writer for Contingencies.