Views and Innovation

Ten themes on retirement
and longevity

Apr 19, 2016

BlackRock and the Global Coalition on Aging (GCOA) recently brought together several dozen leaders on retirement and longevity at three Retirement Thought Leadership Roundtables, held in London, New York, and Tokyo. These Roundtables reflect our appreciation for the global and multi-discipline nature of the challenges and opportunities facing an aging world population. The participants’ expertise ranged from financial services to health care to public policy to technology. They were each asked to submit in advance their “One Idea” to help improve the state of retirement.

While the “One Ideas” cover a wide range of disciplines and timeframes, most clearly fall into one of three broad categories. The first is, of course, savings and investment—finding ways to encourage greater, and earlier, savings and to create smarter investors. The second addresses the implications of longevity on the workforce and economy—for instance, by making it easier for people to work as long as they wish and/or need. Finally, aging brings to the forefront broader societal challenges associated with our health and well-being that go beyond, but can substantially impact, finances.

Several core themes emerged from the “One Ideas” themselves and the discussions:

1. Solutions—and Even Discussions—Must Be Holistic and Interdisciplinary. All participants agreed that BlackRock and GCOA had done something invaluable and perhaps unprecedented simply by convening in one room experts from different fields related to aging. Discussions are too often conducted in isolation, with financial, health, technology and other professionals not talking to each other and not understanding how their concerns overlap and affect one another. Solving what some term the “retirement puzzle”—how to fund ever-longer retirements in a resource-constrained environment—will require close cooperation by a range of experts from across disciplines, geographies and sectors. For instance, the issue of long-term care presents health, financial, technological and public policy challenges that can only be effectively addressed when all are approached in concert. Even amongst government agencies—for instance, pension and health ministries—they will need to work together more closely, sharing resources and expertise.

2. "Retirement" Is Outmoded. Perhaps the most insistent and consistent theme at all Roundtables was that traditional notions of “retirement” are outmoded. In particular, the expectation that people should want (or be forced) to stop working at age 65 no longer makes sense in a world in which people live longer, live healthier as they age, and the ratio of old to young is considerable and growing. Yet as longevity has increased over the past century, we’ve tacitly tacked all the added years on at the end. Apart from the undesirability of making “old age” the longest phase of one’s life, it’s unrealistic to expect that most workers will be able save enough over the course of a 40-year working life to fund a possible 30-year (or longer) retirement. Roundtable participants agreed that there should be no hard boundary on where work ends and retirement begins. In particular, mandatory retirement ages at the employer level need to be re-thought and in most cases reconsidered. Instead, we need to think in terms of a new “life script” that allows for greater flexibility, time off or part time work mid-career, more opportunities for education and retraining across our life course, and “phased retirement” in which people reduce their hours, shift into less demanding roles, and so on, but do not abruptly leave the workforce at some pre-set (and arbitrary) age. In Japan, this issue is complicated by the “lifetime employment” professional norm—the practice of retaining workers for their entire careers—practiced by the larger, more established companies. The embedded notion of a tenure-based employment and compensation system may make the idea of part-time or “transition” employment difficult to implement on a national basis within this set of firms. Other East Asian economies with a similar tradition, such as South Korea, have moved away from this practice.

We need to think in terms of a new “life script” that allows for greater flexibility, time off or part time work mid-career, more opportunities for education and retraining later in life, and “phased retirement” in which people reduce their hours, shift into less demanding roles and the like.

3. Working Longer Is Good for Everyone. Research shows that working longer is good for people, companies, and the broader economy.1 Remaining active, including working, improves mental health, which in itself can lead to better physical health. Staying employed, and the resultant better health, leads to greater financial well-being. For instance, one of the most impactful ways to improve one’s retirement finances is simply to work a bit longer. In Japan, the pressure to work longer is increased by a shifting cultural custom: financial support from younger family members to older relatives is beginning later and later in the lives of older people. E.g., support used to begin in a person’s early 60s but now is more likely to begin at nearly 80 years old.And that support continues to lessen. But there are also ample positive reasons to work longer. For companies, it’s been shown that intergenerational workforces—mixes of older and younger workers—are more productive than those of predominantly one age group.Retaining older workers also helps firms avoid “brain drain”—especially by workers trained in skills that are in short supply among younger workers. Studies also show that when people work longer, overall productivity and GDP rise.4 Fears of older people keeping or taking jobs, instead of making way for the young, are without foundation.5 Yet—while without basis—this fear is real and will have to be addressed. Similarly, while companies benefit from older workers, most HR departments have yet to internalize this fact and employment practices lag.

4. Technology Can Deliver — but May Pose Unintended Consequences. Technology can positively transform many aspects of the retirement landscape. “Robo-advisors—automated services that provide investment advice—can serve millions at a fraction of the cost (to both the industry and end-users alike) of a traditional advisory practice. Although, among the drawbacks of such services, they can’t provide tailored, highly specific advice like what an investor can get from a human financial advisor. Beyond savings and investing, the emerging practice of “robo-care”—pioneered in Japan—can greatly mitigate the cost of elder care by reducing the need for expensive human care-givers. For instance, companies in Japan have developed robotics technology that not only makes it easier for the elderly to perform manual labor—keeping them in the workforce longer—but also technology that aids caregivers and even automates certain tasks, such as housecleaning. While not all Roundtable participants agreed, some warned that there might be a real cost: less human interaction is associated with cognitive decline. Yet there may also be technological solutions to the problems that technology itself creates or exacerbates; e.g., self-driving cars to help older people stay in face-to-face contact with family and friends. On balance, the promise of technology to improve quality of life as people age should outweigh any potential drawbacks. But we must be mindful of possible unintended consequences.

5. Better Communication Can Improve Savings Behavior. While the financial services industry has long been skeptical that better communications can raise savings levels, several of the Roundtable participants discussed real-life examples of communications that worked. At its core, is the need to re-establish trust with potential investors who may avoid investing for retirement in the belief that the financial system and participating firms are rigged against them. Common threads to building a connection are simplicity; direct, jargon-free language; and speaking to people in different ways depending on what stage they are at in life. For instance, it’s counterproductive to talk to young workers about “retirement,” a goal that seems to them impossibly distant. Language around “savings” works better. Older workers closer to retirement age respond well to messages that speak directly to their concerns about retirement. This will be a challenge for the financial services industry which, historically, has been technical, product-focused and accustomed to dealing with large institutions. Participants agreed that the industry will need to adjust and refocus some of its messaging to account for transfer of risk—and decision-making responsibility—from institutions to individuals, many of whom often lack investing know-how and sophistication. Given the complexity of some financial decisions, it’s worth considering whether, how, and to what extent investors could and should be led through key investment decisions by processes that don’t explain each step along the way.

6. Regulation Is Making it Harder for Savers to Get Advice. In the U.S. especially, but also (to a lesser extent) in other countries, there is a growing gap between the responsibilities that current public and private arrangements to finance retirement expect of individuals and the help available to them. With the relative decline of defined benefit plans and the rise of defined contribution plans over the last 30+ years, governments, companies and other institutions have been transferring retirement risk from themselves and onto individuals. At the same time, stricter and more complex fiduciary regulations increasingly limit the advice that various experts in the financial sector can offer. With the transfer of risk to individuals should come a greater availability of professional advice, but thus far the rules seem to be going in the opposite direction.

7. Rising Inequality? One danger is that as people live longer, the socio-economic gap between the top and bottom of society will widen further. Most developed countries have already seen significant increases in inequality since the middle of the 20th century.6 It’s also clear that longevity and good health later in life generally correlate with wealth and education.7 There is no panacea that can solve this problem. However, participants agreed that policy makers can and should explore ways to avoid making it worse. For instance, many advanced economies seem to be heading for a future in which the less well off—who are still working and, on average will die younger—end up subsidizing the more well off who enjoy decades-long retirements, financed in part by state pensions funded by the taxes paid by their less-well off fellow citizens. The way state pensions are financed and allocated may have to be rethought in light of this trend. In Japan, some of the leading thinkers take a different approach and question measuring quality of life as purely or mostly in terms of economics. In a population no longer growing, in one of the world’s richest and most advanced societies, how much additional well-being or enjoyment (for instance) does a third car really provide? Or should the true measure of a society’s well-being shift from economic data to more holistic approaches focused on health, connectedness, happiness and similar factors?

8. Level of Retirement Ownership by Individuals. In many jurisdictions, the responsibility for retirement—decisions, planning, outcomes, everything—has for decades been steadily transferred from institutions to individuals. Defined benefit plans—public and private—have long been giving way to defined contribution-type plans which ask much of participants in the way of vigilance and even expertise. This new accountability has not been met with a corresponding shift in government policies, employer incentives, investment products and personal tools and education. For instance, most populations still lack easy-to-understand and easy-to-use products, as well as access to levels of financial education necessary to empower individuals to take charge of their own retirements. Today, in most developed nations, individuals are only starting to recognize and internalize their newfound responsibility. Further complicating the matter, many employers are unclear on what role, if any, they should play in this new environment. All of these issues have come to the fore in the U.S. and U.K. in recent years, with the U.K. arguably going further than the U.S., with the government’s shift away from requiring annuity products but also taking some encouraging (if early) steps to address the “knowledge gap” by examining restrictions on giving advice. In Japan where the average lifespan is the highest in the world,8 lifetime annuity products barely exist. Introducing annuity or other lifetime income products could help improve lifetime financial security but would require extensive improvement in overall financial literacy.

9. Dementia—The Hidden Killer: Dementia correlates almost perfectly with aging and is arguably the most serious challenge arising from greater longevity. In Japan, fear of cognitive decline is one of retirees’ top concerns. But this fear is present most everywhere in the world. There remains no known cure for Alzheimer’s and thus far, pharmaceutical companies have been reluctant to invest in research since these businesses see clearer paths to returns from other investments. Yet there are ways to detect signs of decline early that could be made better known and that might improve outcomes on the margins, short of an outright cure, which still remains needed. Aside from the personal trauma and hardship, there is an economic impact from this disease. It is estimated that over $818bn (2015) or 1% of global GDP is lost from the direct and indirect effects placed on economies.9 From any angle, dementia is creating havoc at all levels of society.

10. A Demographic Dividend? Many of the world’s nations—Japan foremost among them—are facing an unprecedented demographic situation. For nearly all of human history, in every society, younger people have always outnumbered the old. In Japan today and in many advanced economies, that’s either not true or soon won’t be. This change has profound implications not just for social policy but also for economics and investing. We’ve already seen some of the effects—for instance, the shift increasingly common throughout the developed world from DB to DC pension schemes. Other implications have barely begun to be thought through. In an aging society, people leaving the workforce tend to retain an enormous amount of wealth—accumulated savings and assets—plus expected public and private benefits that can range from pensions to financial support from family. In countries where retirees have accumulated large amounts of capital for retirement, there is an opportunity to redeploy these assets back into the local or international economy to spur growth, especially if currently invested in non-incoming-producing asset such as cash. These types of latent assets could be an untapped resource for economies lacking capital around the world, thereby influencing capital flows as well as reinforcing the economic power an aging population can bring to the global economy and their local market. The specific ways this “demographic dividend” could be realized might take many forms. Globally, very little has yet been done to think through the possibilities, which could potentially create great value for nations and individuals alike.

Bruce Wolfe
Executive Director, BlackRock Retirement Institute
Bruce Wolfe, CFA, Managing Director, is a member of the Global Retirement Strategy group within BlackRock's Global Retail and iShares businesses. Bruce is the ...