Do the local weather and different social dangers play a task in retirement provision?
Climate change is a major challenge worldwide. The Society of Actuaries (SOA) researches a wide variety of risks and their effects on pension provision for various stakeholder groups. Two current SOA research projects that have focused on households and major societal issues are Financial Perspectives on Aging and Retirement Across the Generations and The 14th Annual Survey of Emerging Risks.
Climate change was the top emerging risk in the Emerging Risks survey over the past two years, which indicates a high level of awareness among professional risk managers. Some climate risks affect people in very large geographic areas, while others affect more limited areas. Some are devastating homeowners, from the largest cities to remote farmers. Others affect society in general by affecting the atmosphere, water, or food supply. Many investments are affected by climate problems and risks, regardless of whether they are explicitly recognized or not. Generational research provides an insight into expectations about the importance of climate change in pension provision.
382103 18: (NETHERLANDS OUT) An environmental protest banner hangs on a 500 meter long dike November … [+]
Climate change and pension expectations
The SOA included questions in the 2021 Generations survey to understand how climate change affects personal future concerns about retirement. The survey found the following:
- Concern about the impact of climate change on retirement is greatest among millennials. They are more likely to believe that climate change will affect their health, increase the likelihood of property damage, and affect where they will live in retirement.
- Half of millennials say they are concerned about the impact of climate change on the financial security of their retirement. Only 16% of the silent generation report the same concern.
- Concerns about higher living costs, taxes and insurance costs are the main areas that all generations believe will be affected by climate change.
Climate change is not instantaneous, and its effects are amplified and amplified over time, which could explain why millennials are most concerned. Just like with other retirement concerns, including the retirement savings impact of COVID-19, those who are already retired are not as concerned, likely because they are already settled and expect to continue retiring as they have before.
SURFSIDE FL – June 24: A general overview of the partial collapse of the Champlain Towers South, the … [+]
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Some anecdotes to think about
On June 24, 2021, a building that was part of the Champlain Towers South condominium in Surfside, Florida collapsed. The building was on a barrier island in Miami-Dade County. At this point in time, the number of victims is unknown and the cause of the building collapse has not been determined. However, a major concern related to climate change is the potential for increased flooding of cities and towns and for damage / destruction to buildings on or near a coast, especially when exposed to storms. This collapse of the twelve-story building could be partly climate-related, as the ground is reportedly sinking beneath it. Discussions about possible contributors to the recent building collapse include erosion of the bank, settlement of the land under the building, flooding, and salty air. Extreme storms and fires threaten homes and old-age pensions and are clearly climate-related as extreme events become more likely. At the same time, there are currently weekly reports of tornadoes in the western states, forecasts of increased hurricane activity and a huge drought and heat wave. Any of these events can be very disruptive to retirees and also lead to loss of life. The water supply has become a major risk in the western states as the growing population combined with climate change acts as a threat multiplier.
Social risks and the identification of emerging risks
2020 was a year in which the focus on societal risks was greatly increased. The 2020-2021 experience of the pandemic has reminded us of the importance of resilience and the value of being able to adapt to unexpected circumstances.
The SOA 14th Annual Survey of Emerging Risks was completed in November 2020. 23 risks in five categories were considered. The five most important emerging risks are as follows:
- Climate change – number 1 in 2019 and 2020 – rose to the top 5 in 2018
- Cyber / Networks – number 2 in 2019 and 2020 – was number 1 in 2017 and 2018
- Pandemics / Infectious Diseases – number 3 in 2020 – on the top 5 list for the first time – that was the risk with the largest shift between 2019 and 2020
- Disruptive technology – 4th place in 2020 – Decreased from 3rd place in 2017 to 2019
- Financial volatility – number 5 in 2018 through 2020
Risks that were in the top 5 for each year from 2017 to 2019, but not 2020, included demographic shifts, terrorism, regional instability, and asset price collapses.
Emerging risks are generally not explicitly taken into account in old-age provision. However, organizations that structure investment portfolios, retirement products, and financial wellness programs should consider these risks when structuring their offerings. The risks affect investments in general, the companies that sell retirement products, individuals, and society at large.
Social vs. individual risks
There are a myriad of risks to an individual when focusing on retirement and financial issues. These risks are important for long-term security. Social risks usually affect large groups of people at the same time. Millennials, for example, had a big impact on both the Great Recession and the pandemic. People who struggled to get a decent career start during the Great Recession, or whose homes were demolished during the Great Recession, can still feel the effects years later. You may never catch up. For a discussion of traditional retirement risks, see the SOA publication Managing Post-Retirement Risks: Strategies for a Secure Retirement.
Social events can have long-term effects. The 2019 SOA Risks and Process of Retirement survey included a question about the impact of the Great Recession ten years later. Retirees were asked what impact the 2008 mortgage crisis and the stock market slump had on their retirement. A third of retirees said it had an impact.
Retirement planning models most often focus on the risks that affect individuals year after year, such as inflation, volatility in investment markets, above-expected healthcare costs, long-term care costs, and more. For a discussion of a variety of retirement risks and the implications of COVID-19, see Risks and Planning, What Did COVID-19 Teach Us?[i] However, many people limit their retirement planning to relatively short-term cash flows that mimic their expected expenses and fail to consider the long-term or greater risks. Participants in previous SOA focus group research report that they expect to deal with risk when it occurs rather than proactively preparing for it.
One of the lessons of the last decade is that societal risks are important and more thought needs to be given to how to incorporate them into planning. Climate change is clearly one of the risks that will affect many lives.
[i] By Anna Rappaport, Benefits Quarterly, First Quarter, 2020,