A generation ago most individuals headed into retirement , at age 65 after 30-40 years of service with the same employer, with what appeared to be a secure source of retirement income. The Defined Benefit (DB) pension plan, while it may have been exposed to erosion due to inflation, in most cases, at least it appeared to to be a “guaranteed” source of retirement income.
Well things have changed. Individuals who spend a lifetime with the same employer are now increasingly rare. About half the corporate pension plans are significantly underfunded. Corporations are eliminating DB benefit plans for new and “younger” employees. The only ongoing/constant risk for retirees with unindexed or partially indexed pensions (which is pretty much all, except public service employees) is inflation. The rate of inflation has decreased in the last decade; however due to increased longevity “risk”, the corrosive effect of inflation is still significant.
Pension insurance in Canada ranges from minimal (Ontario) to nonexistent. Transparency as to the funded status of pension plans is limited. In bankruptcy pensioners may have to line up for scraps along with other lowest priority creditors. Current accounting/tax rules actually discourage companies from fully/over funding the pension plans. The list of problems is long, and its extent is just becoming evident as the boomer generation is starting to retire. There is no need for the taxpayer to be on the hook for the fixes, but legislative changes are required to insure that legal obligations are met, opportunity is created for pensioners to buy protection for accrued benefits and those who were prevented from contributing to private registered plans on account of company pension plans can recover the lost benefits.
The impact of taxes on retirees is particularly severe, though politicians will be increasingly sensitive to the growing number and power of boomers. Unchecked property tax increases, well in excess of inflation and often tied property values, often lead to anywhere from significant hardship for retirees to having to sell their homes.
You noticed that life insurance rates have been falling in the past 20 years. It is not just the advent of more competition, but also life expectancy of 65 year olds has increased significantly in the last 50 years. Clearly, living longer is good. Life Insurance, should really be called death insurance, since it pay off to beneficiaries, but only when you die. Whereas, Longevity Insurance, which perhaps should be called Life Insurance since it pays off to you, but only if you live past a certain age (say 80 or 85).
If you die at a younger age, there is a reduced risk of running out of money when you are relying on income from something other than a fully indexed long-service fully indexed pension. However, if you are fortunate to be one of those who will live past age 85, there is a growing risk of running out of money and becoming dependent on family or the state. So think of Longevity Insurance like car insurance, i.e. you only get paid if an “adverse” event happens (a car accident or living past a predefined age). Those who die young won’t miss the funds that they spent on Longevity Insurance to buy peace of mind. Those living much longer will get the benefit of having an additional source of income kicking in at say 85, this reducing the drain on the remaining assets.