[Insight & Opinion] Longer Life, Less Money... 'Longevity Risk' Becomes Everyday Reality

[Asia Economy] Just over a decade ago, the term ‘longevity risk’ was unfamiliar, but now it seems to be becoming a part of everyday vocabulary. Living a long life has been a long-standing desire of humanity, but the world has changed, and now living longer has become a risk. There is a paradigm shift in the perception of human lifespan.

The precise concept of longevity risk varies slightly depending on scholars’ research purposes or economic agents, but from an individual perspective, two points are key. One is that the economic burden grows larger than initially expected as life expectancy increases, and the other is that the timing of death cannot be chosen. From an economic standpoint, the first meaning is important. In Japan, a super-aged country, the term “retirement bankruptcy” is now commonly used, and this term vividly illustrates the essence of longevity risk. Retirement bankruptcy means the body is alive, but all the money is gone, resulting in bankruptcy. It is a life where one wants to spend money until death but has no money left to spend.

The reason longevity risk is difficult to hedge is that it grows over time. Most people judge the lifespan of their assets based on average life expectancy. However, this perception often falls into the trap of averages. What should be emphasized more is the expected remaining lifetime. Expected remaining lifetime refers to the number of years a person of a certain age is expected to live going forward. The problem is that expected remaining lifetime continues to increase. This means one may live longer than they think. Looking at countries like Japan, which are more aged than us, people tend to underestimate their actual lifespan.

The sure way to hedge longevity risk is to ensure that cash flow does not dry up until death. Not only cash flow but also inflation risk, which tends to rise over the long term, must be prepared for. If there is a means to continuously maintain cash flow while preparing for inflation, it would be the most perfect way to hedge longevity risk. However, such financial products or systems are absent in reality. Public pensions like the National Pension reflect inflation until the time of death when paying benefits, but the amount is small. Private sector savings products are difficult to prepare for inflation, and investment products can hedge against long-term inflation risk but require bearing volatility risk. Until now, savings and investments were made from the perspective of accumulating retirement assets, but going forward, withdrawal strategies that can hedge longevity risk will become important. In other words, the paradigm of managing retirement funds will shift to an era where it is necessary to continue investing while withdrawing money wisely, rather than just earning more.

If the state fails to properly respond to longevity risk, it is highly likely to face fiscal problems. As the elderly population increases, welfare costs for the elderly inevitably rise proportionally. If the working-age population grows and productivity increases, these costs can be socially managed, but such solutions are becoming less effective due to low birth rates and other factors. Welfare costs have a fixed cost nature, and under the one-person-one-vote system, the emergence of ‘silver democracy,’ where elderly people vote for themselves, makes it politically difficult to reduce these costs. Politicians promise many things during elections, but in an era where the elderly population surpasses the working-age population, those promises are likely to end as mere slogans or cause other side effects.

There is still time. It is now time for both the state and individuals to seriously review and contemplate how to prepare for longevity risk. Humanity has never faced longevity risk on such a large scale before. New ideas and new methods are urgently needed.

Sang-geon Lee, Head of Mirae Asset Investment and Pension Center