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IMF Warns U.S. Underestimates Costs of Citizens Living Longer
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IMF Warns U.S. Underestimates Costs of Citizens Living Longer

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IMF Warns U.S. Underestimates Costs of Citizens Living Longer

The U.S. and other governments are likely underestimating the life expectancy of their aging populations, a risk that could boost pension liabilities by nearly 10% and balloon already massive public debt levels, the International Monetary Fund warned Wednesday.

The IMF said many governments should act now to raise mandatory retirement levels and encourage pension plans to better hedge their risk.

“Delays would increase risks to financial and fiscal stability, potentially requiring much larger and disruptive measures in the future,” IMF economists wrote in a chapter of the fund’s Global Financial Stability Report.

Erik Kopper, one of the chapter’s authors, said the chance the issue causes a major market disruption in the next couple of years is very low. But the longer governments put off dealing with the risk, the harder it will be for them to fix as the potential costs accumulate. For example, someone starting to save for retirement in their 20s stands a greater chance of covering their costs in their old age than someone who starts in their 40s.

Expanding pension and entitlement costs are already one of the biggest challenges facing many rich countries battling to cut unhealthy budget deficits and mountainous debt overhang. In the U.S., the issue is a major topic in the election fight between Republicans and Democrats over control of Congress and the White House.

If the IMF is right, and the U.S. is underestimating the life expectancy of its population by three years, then Washington’s potential debt problems are far worse than originally thought.

The fund says few governments or pension providers adequately recognize longevity risk, including in public plans and social security systems. The economists found that planners typically underestimate longevity by three years on average, a mistake that could cost advanced economies half of one-year’s gross domestic product.

For the U.S., that would mean a $7 trillion error in calculating future costs over the next 40 years. That’s roughly $175 billion a year.

“These risks build slowly over time, but if not addressed soon could have large negative effects on already weakened private- and public-sector balance sheets,” the IMF cautioned. That would make them “more vulnerable to other shocks and potentially affect financial stability,” it said.

The U.S. last year lost its premier credit rating over concerns about the ability of the government to rein in its debt and deficit levels, sending shock waves through markets. The IMF has warned the U.S. that its standing in financial markets could unexpectedly tumble if it doesn’t soon present a credible plan to tackle its fiscal problems.

Besides largely ignoring longevity risk, the IMF says one of the major problems is the use of outdated data on life expectancy. For example, a study of U.S. Department of Labor statistics found that until recently, a majority of pension plans used mortality rates dating to 1983.

But in the quarter century since then, medical advances have pushed back the average schedule for death. Using the three-year error rule, that may mean many U.S. pension plans could be facing liabilities 9% higher than budgeted.

The U.S. is not alone, however. The IMF estimates that Japan, Canada, France, Spain and Germany–several of which are already struggling with debt overhang–also face potentially huge gaps in funding for pensions and entitlements if they are wrong about the longevity of their populations.

As such, longevity risk potentially adds one-half to the vast costs of aging up to the year 2050, a sum totaling tens of trillions of dollars, the IMF said.

“These costs are high enough that they can’t be absorbed by any one sector…only by government, only by corporations, only by individuals” said Laura Kodres, a senior author of the report.

“That risk has to be acknowledged, it has to be assessed, and then it has to be shared,” she said.

IMF Warns U.S. Underestimates Costs of Citizens Living Longer - Real Time Economics - WSJ

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