Longstanding and Novel Risks Facing Households Already Retired and Households in the Run-Up to Retirement
Both preretired and already retired households have always faced, in varying degrees of severity, five basic risks. This essay will describe and analyze each of the five risks in a detail appropriate to the essay’s length, and will address the extent to which formal or informal insurance arrangements or institutions can address them adequately. But it will also address a new, and forbidding, risk that could affect each of the five longstanding risks: the risk or risks entailed by the economic and financial consequences of the COVID-19 pandemic. The essay’s presentation addresses each of these five risks, and ends with some tentative conclusions and recommendations for public policy, and for households and businesses.
The term “longevity risk” refers to the risk of outliving one’s resources. It stems from the basic fact that lifespans are unpredictable. As in most countries, the United States provides basic longevity insurance through the federal government in the form of the indexed annuity to which virtually all working Americans are entitled once they reach the age of 62. The benefit is progressive: its marginal replacement rate declines, and declines quite markedly, as average income as the Social Security Administration (SSA) calculates it, increases. The benefit is also structured to increase at a rate that is slightly more than actuarially fair as the age of the claimant increases from 62 to 70, at which age it stops increasing.