Providing Americans with adequate retirement income and affordable medical care was one of the country's most hotly debated social and political topics of the 20th century. However, the times have changed, along with longevity, as the medical cost of that prolonged longevity has risen, and corporations’ ability to absorb the risks associated with multidecade portfolios to finance those commitments has fallen. Over the past three decades, corporations in the private sector have successfully shifted the responsibility of retirement to individuals, as programs have been frozen or closed to new employees, with 401(k)-type saving programs acting as substitutes. What remains is a lingering program of the past that will slowly decline in size and number of covered retirees over the coming decades. For now, both S&P 500 pensions and OPEB remain a manageable cost with sufficient resources and cash flow to support them— as slowly increasing interest rates could improve funding via lower discounted liabilities for 2018. For 2017, corporate pension underfunding stood at USD 304 billion—22.1% lower than the USD 391 billion level of 2016, as markets posted a second year of impressive double-digit gains. The funding level increased to 85.62% in 2017 from 80.75% in 2016, 81.14% in 2015, and 81.12% in 2014. The most recent low-funding level was in 2012, at 77.26%, with the last full-funding level occurring in 2007, at 104.40%.
Clearly, the traditional defined-benefit corporate pension has become a relic of an earlier age, one that dates back to World War II, when the average American's life expectancy was 65 years. By 1974, when Congress passed the Employee Retirement Income Security Act (ERISA; the federal law that sets minimum standards for most voluntarily established pensions in the private industry), Americans’ average life expectancy had risen to 72 years. Today (according to the Center for Disease Control), the average life expectancy in the U.S. is 78 years (76 years for men and 81 years for women). In 1983, when the life expectancy was 74, the official Social Security age of "full retirement" was scaled forward from 65 years to 67 years, depending on the year of birth, as longevity continues to move up. Medicare eligibility, however, has remained at 65. As a result, post-employment medical costs associated with longevity have skyrocketed, as have the costs of prescription drugs and elder care.
OVERVIEW
- Equity markets continued to set new highs last year, posting double-digit returns and outpacing the cost of lower interest rates, which have pushed up discounted liabilities, resulting in a 22.1% improvement in underfunding for 2017.
- Interest rates utilized for discounted pension liabilities again declined in 2017, after 2015’s significant increase, and are less than half of those used in 2001.
- Expected pension return rates declined for the 17th year in a row.
- Most corporations have successfully shifted the burden of risk for retirement to the employee, as 401(k)-type savings accounts have become the norm, and active defined-benefit pensions in the private sector have become few and far between.
- Given the dwindling coverage, the current obligations of pensions and OPEB are a manageable expense for most companies.
- OPEB coverage continues to decline, as fewer covered retirees cost more per person, but are a quantifiable cost with a declining obligation.
