A Look into the Future – How will the

Retirement of the Baby Boom Generation

Affect Your Pension Plan?

David Lamoureux
Supervising Pension
Actuary
CalPERS

1
Overview
• Aging Baby Boomers
• Actuarial Mathematics Refresher
• Impact of Baby Boomer Retirements
• Impact of Changes in Life Expectancies
• Where are the Rates Heading

2
Facts about U.S. Baby Boomers
• Those born between 1946 and 1964

• Currently between the ages of 42 and 60

• Starting January 2006, every 7.7 seconds, a baby

boomer turns age 60

3
Facts about U.S. Baby Boomers
• This population group is about 78 million

• The first wave will become eligible for Social Security

early retirement benefits in 2008

• Most are expected to move out of the labor force and

retire within the next 25 years

4
Concerns about Baby Boomer
Retirements

• About 33% of baby-boomer households do not

own assets
• Potential budgetary pressures when baby boomers
collect Social Security and Medicare benefits

Source: GAO analysis of 2004 survey of consumer finances

5
U.S. Population and Age Distribution

Percentage of Population
over age 50
Year
1900 13%
2000 27%
2020* 35%

* Projected

6
Age Distribution of U.S. Workers

Source: Bureau of Labor Statistics

7
Age Distribution of CalPERS Active
Members
45,000

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0
15- 25- 30- 35- 40- 45- 50- 60- 65 + 15- 25- 30- 35- 40- 45- 50- 60- 65 + 15- 25- 30- 35- 40- 45- 50- 60- 65 +
24 29 34 39 44 49 59 64 24 29 34 39 44 49 59 64 24 29 34 39 44 49 59 64

June 30,1996 June 30,2001 June 30,2005

8
Age Distribution of CalPERS Active
Miscellaneous Members
45,000

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0
15- 25- 30- 35- 40- 45- 50- 60- 65 + 15- 25- 30- 35- 40- 45- 50- 60- 65 + 15- 25- 30- 35- 40- 45- 50- 60- 65 +
24 29 34 39 44 49 59 64 24 29 34 39 44 49 59 64 24 29 34 39 44 49 59 64

June 30,1996 June 30,2001 June 30,2005

9
Age Distribution of CalPERS Active
Safety Members
10,000

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0
15- 25- 30- 35- 40- 45- 50- 60- 65 + 15- 25- 30- 35- 40- 45- 50- 60- 65 + 15- 25- 30- 35- 40- 45- 50- 60- 65 +
24 29 34 39 44 49 59 64 24 29 34 39 44 49 59 64 24 29 34 39 44 49 59 64

June 30,1996 June 30,2001 June 30,2005

10
Actuarial Mathematics Refresher

11
Pension Plan Mathematics
• Basic Formula for any Pension Plan
Member Contribution
+ Employer Contribution
+ Investment Income
= Benefits + Administrative Expenses

12
Lots of Unknowns
• Final salaries, years of service, time of retirement
& life expectancy are unknown

• Benefits and how long they will be paid are also

unknown

• Investment Income is unknown

13
Attacking the Unknown
• Actuary must make assumptions

• To develop these assumptions, the Actuary does

the following:
– Study the past (experience study)
– Judgment call about potential future economic and
demographic changes

14
Attacking the Unknown
• Economic Assumptions

• Examples include:
– Salary growth
– Annual inflation
– Investment return

15
Attacking the Unknown
• Demographic Assumptions

• Examples include:
– Mortality
– Incidence of retirements
– Termination of employment
– Incidence of disabilities

16
Attacking the Unknown

• Assumptions are used in actuarial valuations and

rate setting
• Accomplished by a complex computer program
called an actuarial valuation system

17
Attacking the Unknown
• Actuarial assumptions are for the long term

• Assumptions might be correct for the long term

but they will not be realized from year to year

• Adjustments in the employer contribution rate are

needed

18
Impact of Baby Boomers Retiring

• How will my plan be affected?

• Is my rate going to increase?

• Are costs going to be more volatile?

19
Comparison with Social Security
• In 1945, there were 42 workers for each retiree

• That ratio dropped to 3 workers in 2005

• In 2030 there will be 2 workers for each retiree

20
Comparison with Social Security
• Social Security is funded on a pay-as-you-go basis

• Payouts depend on the tax revenues generated by the

working population

21
Comparison with Social Security
• Plans at CalPERS are pre-funded and contributions are
received in the year that members accrue their benefits

• The retirement of baby boomers has already been

reflected in the rates using actuarial assumptions

• At retirement, the money needed to pay all future benefits

is expected to be there

22
How Will Plans at CalPERS Be
Affected?

• Increase in the number of retirements each year

• Shift in the membership i.e. less active members

per retiree

• More benefits payments will be paid out

23
 Number of Retirements
1995-1996 Through 2004-2005
12,000

10,000

8,000

6,000

4,000

2,000

0
FY 1995-1996 FY 2000-2001 FY 2004-2005

Public Agency - Safety Public Agency - Misc All Public Agencies

24
Age of New Retirees

• The number of retirements has increased but the

average retirement age has not changed
significantly

• Average retirement age for Miscellaneous

members has gone from age 60 in 1996 to 59 in
2005. For safety members, the average has
remained at age 55
25
 CalPERS Projected Retirements
(2006 through 2020)
30,000

29,000

28,000

27,000

26,000

25,000

24,000

23,000

22,000

21,000

20,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
26
Shift in Membership

• The ratio of the number of active members to the

number of retirees is a good measurement of the
shift in membership and maturity of a pension
plan

• The retirement of the baby boomers is expected to

impact the ratio of active members to retirees

27
 Ratio of Active to Inactive workers

• The ratio of active to inactive workers has fallen

to roughly 1-to-1 in the defined benefit pension
system, down from more than 3.5-to-1 in 1980
Pension Benefit Guaranty Corporation (PBGC)

28
Ratio of CalPERS Actives to Retirees
(1970 - 2005)

29
Ratio of CalPERS Actives to Retirees
(Projected 2006 – 2020)
2.00

1.75

1.50

1.25

1.00

0.75

0.50

0.25

0.00
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

30
Ratio of CalPERS Actives to Retirees
(Projected 2006 - 2056)
1.80

1.38

1.13
1.05 1.05 1.07

2006 2016 2026 2036 2046 2056

31
More Benefit Payments Will be Made

• As expected, the retirement of the baby boomers

will result in more benefit payments being paid
out of the fund.

• CalPERS has already studied the impact as part of

its Asset Liability workshop.

32
 Benefit Payments
(6/30/1996 - 6/30/2005)
$9

$8
Benefit Payments in
Billions of Dollars
$7

$6

$5

$4

$3

$2

$1

$0
06/30/1996 06/30/1997 06/30/1998 06/30/1999 06/30/2000 06/30/2001 06/30/2002 06/30/2003 06/30/2004 06/30/2005

33
 Projected Benefit Payments
(2006 – 2020)
$27

$25 Benefit Payments in

Billions of Dollars

$23

$21

$19

$17

$15

$13

$11

$9

$7

$5
2006 2008 2010 2012 2014 2016 2018 2020

34
 Projected Benefit Payments
(2006 – 2056)
$95

Benefit Payments in
$85 Billions of Dollars

$75

$65

$55

$45

$35

$25

$15

$5
2006 2016 2026 2036 2046 2056
35
Will Employer Rates Increase with the
Retirement of Baby Boomers?

• No, unless the baby boomers retire faster than

anticipated by actuarial assumptions.

• However, if in the long run baby boomers are not

all replaced by new employees and the active
payroll is lower, then the rates could be higher as
a % of payroll.

36
Are the Costs going to be More
Volatile?
• Yes.

• As mentioned before, the shift in membership will

result in your plan being more mature

• Mature plans have higher levels of assets

compared to the payroll of the active population
37
Volatility Index
• The size of the assets when compared to payroll
affects how the employer rate changes from year
to year

• “Volatility Index” = Assets / Payroll

• Higher “Volatility Index” => more volatile rates

38
Volatility Index

• The retirement of baby boomers will result in

higher volatility index i.e. more volatile rates

• Current rate smoothing policies will mitigate the

impact

39
Impact of Changes in Life
Expectancy

• What if baby boomers live longer that previous

generations?

• Will it impact our rates?

40
Life Expectancy at Birth

41
Life Expectancy of Seniors

42
Current Life Expectancy of
CalPERS Members

• Studies done by CalPERS actuaries have shown

that the life expectancy of miscellaneous and
safety members is the same.
43
Historical Life Expectancy of
CalPERS Members

44
What if Life Expectancy Improves?

• If life expectancy improves then more benefits

would be paid from the pension plan

• Employer would face increases in cost

• Future experience studies will reflect

improvements in life expectancies, if any.

45
Impact of Improvement in Life
Expectancy

• Using a published mortality improvement scale,

we estimated what the life expectancy might be in
5 years, 10 years and 20 years

46
Impact of Improvement in Life
Expectancy - Male

47
Impact of Improvement in Life
Expectancy – Female

48
Impact of Improvement in Life
Expectancy
• The estimated impact on rates for Miscellaneous
Plans would be:

49
Impact of Improvement in Life
Expectancy
• The estimated impact on rates for Safety Plans
would be:

50
Where are the Rates Heading?

51
Where are the Rates Heading?

• The biggest impact on rates is the investment experience

• With the new rate stabilization policies, the rates are

expected to be more stable

• Lets see how we expect the employer rates to change

based on the volatility index

52
2007-2008 Rates

• The calculation of all 2007-2008 rates has just

been completed

• 2007-2008 rates were affected by:

– 13% investment return for 2004-2005
– Other gains/(losses)

53
2007-2008 Rates
• 13% investment return resulted in small asset
gains which caused a small reduction in rate
• Most of the asset gains were set aside for the
future

54
2007-2008 Rates
• Overall, the change in rate varied by plan
– Affected by demographics, asset/payroll ratio,
amortization period and funded status

• See your June 30, 2005 valuation report for a

reconciliation of how your rate changed

55
Estimated 2008-2009 Rates

• 2008-2009 rates will reflect the impact of the 05-

06 investment return of about 12%

• 12% will result in additional asset gains

• Smoothing policies will result in most of the asset

gains being set aside for the future

56
 Estimated 2008-2009 Rates
CalPERS estimates that the average employer rate for
public agencies will decrease as follows for the 2008-
2009 fiscal year (when compared to the 2007-2008 rate):

Volatility Index
4 6 8 10 12
Estimated Change in FY
2008-2009 Rate (0.3%) (0.5%) (0.6%) (0.8%) (0.9%)

57
Estimated Rates Beyond 2008-2009
• Due to the uncertain nature of the investment
markets, it’s impossible to predict where the rates
will be in the future

• CalPERS actuarial staff performed “stochastic”

projections to calculate probabilities for future
employer rates

58
Estimated Change in Rates Beyond
2008-2009

59
Estimated Change in Rates Beyond
2008-2009

60
Estimated Change in Rates Beyond
2008-2009

61
Estimated Change in Rates Beyond
2008-2009

62
Estimated Change in Rates Beyond
2008-2009

63