How long are you likely to live after retiring? Will the Fund still be operational?

By William Stewart
Special to the Saipan Tribune

People responsible for calculating long term retirement payments use a very important statistical data base to assist in the management of the financial resources placed in their trust as well as to determine future financial “pay-out” requirements, such as, for example, monthly payments to retirees.

These data are period life tables that present what would happen to a hypothetical cohort (a group of people that share particular characteristics) if it experienced throughout its entire life the mortality conditions of a specific period of time. The period life table may be characterized as rendering a “snapshot” of current mortality experience and shows the long-range implications of a set of age-specific death rates that prevailed in a given year.

Simply stated and selecting a single hypothetical individual for purposes of citing an example: if Jose were to retire at age 65 and barring any fatal accident or catastrophic disease, statistics will tell us the average number of years of life remaining for Jose and all the others in his cohort will be 14 years and 7 months. (This is depicted in the data table as the decimal equivalent of six tenths of a year). From that information the amount of money that will be necessary to pay Jose from the date of his retirement to the end of his life can be calculated rather closely.

Life tables for the population in the Northern Marianas are calculated combining data for both indigenous and non-indigenous resident population as based on the 2000 census of population and updated as of July 2003 by the U.S. Census Bureau. Unfortunately foreign workers are included with the result that these data are seriously skewed; however, for purposes of citing an example they are the only data available to me. In any case since most foreign workers tend to be under the age of 40, for our purposes the data presented can be considered indicative of that expected to prevail and thus useful. As ages increase there are fewer foreign workers in each cohort series and the data become more reliable with advancing age.

The most frequently used life table statistic is the life expectancy which is the average number of years of life remaining for persons who have attained a given age.

For example, if you are an indigenous or non-indigenous resident person within the following age cohorts your estimated remaining life expectancy has been calculated as follows:

Males | Est. Years Life | Est. Year
At Age | Remaining* | of Demise*
40 | 35.5 | 2038
45 | 30.9 | 2033
50 | 26.4 | 2029
55 | 22.1 | 2025
60 | 18.4 | 2021
65 | 14.6 | 2017
70 | 11.6 | 2014
75 | 9.2 | 2012
80 | 6.9 | 2009

Females | Est. Years Life | Est. Year
At Age | Remaining * | of Demise*
40 | 39.8 | 2042
45 | 35.1 | 2038
50 | 30.6 | 2033
55 | 26.3 | 2029
60 | 22.2 | 2025
65 | 18.6 | 2021
70 | 15.5 | 2018
75 | 13.0 | 2016
80 | 11.3 | 2014
Source: U.S. Census Bureau. Base year 2003.
* Fractions less than a full year not calculated.

Of course, these data require annual revision and, as might be expected, differ considerably as a result of ethnicity and gender. Females generally live longer than males. Some ethnicities have a shorter life span than others.

For those who are now retired, follow along with me while I make a point that, while your mother may love you—the government may not.

Select your age range from the data table presented (or as close to it as possible) and from the opposite column locate the estimated number of years remaining as the life expectancy for that particular age. Multiply that figure by your annual retirement annuity and you will arrive at a figure that represents your theoretical retirement income for the rest of your life. Of course, this assumes that the Fund will be able to continue payments to you based on the present formula for determining your annuity. For purposes of our example the figure does not include annual cost of living increases (COLA) since they are unknown and difficult to forecast and also to display in the limited space available. Annual cost of living increases are supposed to compensate for the cancer of inflation—but often they don’t. Everyone realizes that except the government.

Don’t confuse the lifetime amount of your “fixed” income with the purchasing ability of your dollar because each year your income will purchase less as its buying power is eroded by inflation. For example, less than 30 years ago the dollar would buy 9 pounds of rice but it will not do so today and certainly will have even less value in the future. Because of this economic fact the hundreds of millions of dollars that the central government now owes the Fund must be paid as based upon calculated “nominal” interest rates. What’s that?—you might ask. Nominal interest rates include inflation premiums to compensate lenders and investors of money (the Fund) for the fact that the dollars that will be paid back by the bank will have less purchasing power than the dollars initially invested (or borrowed). The Fund should never agree to settle for repayment based on “real” interest rates because inflation premiums will have been subtracted out with the result that “real” rates are smaller than “nominal” interest rates by the amount of the inflation premium. If this appears a bit complicated, I’m sorry but that’s a fact of life and cannot be ignored. Life is complicated but it’s better than the alternative. If your retirement income is your only source of income, chances are you will get poorer and poorer even with COLA payments as the years go by, all the while you get older and older.

Now imagine the money the Fund requires to meet the annual annuity payments for the approximately 1,900 retirees plus an ever increasing number as people leave the active roles of government employment and retire. There are now about 5,225 government employees currently employed. You should now begin to appreciate the huge sum of money needed each year by the Fund in ever increasing amounts.

If attitudes don’t change with respect to the central government’s financial obligations to the Fund, it’s going to be “sorry about that” because the money will not be available as the future years unfold. Why? The Fund needs an injection of capital every month for three reasons: (1) to make the bi-monthly payments to retirees; (2) to invest in interest earning instruments in order to make future payments to retirees, and (3) to meet its own administrative overhead. If you do not understand this go to any banker, accountant, CPA, investor or Fund official and they will explain it to you—but don’t go to the central government.

So, here’s the problem. People are living longer with the result that the estimated life expectancies indicated here-in will increase, meaning that the Fund have longer annual “pay-out” periods as we move further into the 21st century. In addition, since the older a person becomes the more personal medical attention becomes a costly fact of life, thus greater pressure on health providers and CHC and, of course, the Retirement Program’s health and medical program.

Second, the money will not be there in a sufficient amount if the central government continues to renege on meeting its long-term full financial obligation to the Fund by paying the many hundreds of millions it currently owes plus interest—and also by not meeting its matching monthly employer obligation. If the government continues on this present course the iceberg is in front of you and there are no life boats on the horizon.

(The author, as a forensic economist, often utilizes life expectancy data, inflation and discount rates and data related to a variety of investment instruments applied to real life situations in the NMI and elsewhere. www.cnmi-guide.com/phm/esc/#forensic)