Book review: The 100-Year Life by Lynda Gratton and Andrew Scott
How will people adjust their lives to the likelihood of living to 100, and what does this mean for their finances and careers? These are some of the questions tackled in this new book written by two London Business School academics.
Demographic trends should be the most predictable of economic projections. Not surprisingly demographics, and the rapid ageing of populations, have been extensively debated by economists for some time – Peter Drucker was writing about the greying of the US population in 1976, and correctly predicted the pressures that we are now seeing on Medicare and Social Security.
In the UK, Amlan Roy has been analysing the consequences of ageing populations for markets and savings for at least 15 years and Robert Malthus started the ball rolling in the 18th century with An Essay on the Principle of Population.
Despite this focus, public policy in most countries has not fully reflected changes in the mix of populations. “The 100-Year Life” is the latest contribution aimed at influencing the debate, written by two London Business School academics, Lynda Gratton and Andrew Scott.
Their perspective is more anthropological than economic, and they describe hypothetical lives for individuals born in 1945, 1971 and 1998 respectively. They do not add much to the analysis of the issues, but stand firmly on the utopian side of the outlook: their perspective is that rather than worrying about providing better care for the elderly, or saving more for retirement, we should be looking at how we will adjust our lives to the likelihood of living to 100.
End of the three-phase life?
The majority of the book is devoted to expounding the view that the traditional three-phase life (education, employment, retirement) will be replaced by a series of shorter stages, a mix of traditional working patterns, entrepreneurship, further education, concurrent part-time roles and so on. Crucially we need to maintain this pattern into our 80s in order to accumulate the financial resources necessary for a comfortable lifestyle. This view in turn hinges on the assumption that it will be impractical for people to save enough in conventional employment to finance a retirement that might last 30 years or longer.
The less palatable alternative, of course, is that people adjust to living on lower incomes in retirement, which is what is already happening in the US, the UK and Australia.
Gratton and Scott make the further assumption that life expectancy at birth will continue to rise in a straight line. This is what has been happening: since 1840, life expectancy at birth for Americans has increased by three months every year, so it is tempting to believe this will continue. Yet the most recent statistics question the continuation of the trend: the recently released 2015 statistics for the US showed that life expectancy (now 78.8 years) has failed to rise for the first time since 1993, and deaths from most major diseases, and particularly Alzheimer’s, have increased year on year. At the same time a report in the UK identified the increase in obesity as a major future health issue (although there is no sign in the UK of rises in life expectancy tailing off yet). So Gratton and Scott’s optimism should not go unchallenged.
The authors also take for granted that individuals will have considerable control over their lives and can make and implement rational decisions about when, for example, to give up a secure job in favour of a further period of education. The background they seem to envisage is one of steady economic growth and full employment. In practice we know that the business cycle has not been abolished, and individuals will continue to be at the mercy of bigger economic forces. Moreover, any individual who breaks up her career has to be confident that periods spent voluntarily outside full-time work will lead to improved lifetime earnings. This is unlikely to be the case across the economy as a whole.
The inequality issue
Although Gratton and Scott acknowledge the problem of inequality, it deserves a lot more focus. In the US and elsewhere, income is a strong predictor of life expectancy. People in the lowest quintile by income have seen flat or declining life expectancy in the last 30 years, while those in the top quintile have experienced material gains. Similarly, mortality rates for middle-aged whites in the US have deteriorated while those for African-Americans and Hispanics have improved. Longevity for those on low incomes is much better in relatively prosperous New York and San Francisco than it is in Detroit.
The lifestyle built from multiple stages driven by personal decisions is unlikely to be available to large, and growing, groups in the population without a significant policy response from governments.
Scrutinising the savings rate
So what are the alternatives? Gratton and Scott conclude that the level of savings required to support a lengthy period of retirement at the end of a 100-year life is unachievable: even assuming a 3% real rate of return on investments, they believe that the savings rate necessary to support replacement income of 50% in retirement – they calculate 17% of income for the individual born in 1971 – is unachievable.
Work done by Schroders (Lessons learned in DC from around the world, 2013) suggests this is an overly bleak perspective, and also that the issue is more complex. The assessment of an appropriate replacement rate of income from defined contribution pensions depends on the level of the state pension and also varies according to levels of income in employment: those on low incomes need a much higher replacement rate.
Later and more flexible retirement dates are inevitable and already taking effect in many countries, but this trend need not go as far as a normal expectation of working into the 80s. As a broad conclusion, however, we believe the combination of 15% contributions, a 3% real rate of return, and a modest increase in retirement age is the minimum necessary to achieve an adequate standard of living in retirement. Indeed the generally admired – and compulsory – Australian pension system is currently based on eventually reaching 12% contributions.
Where Gratton and Scott are right is that behaviourally it is difficult for most people to save enough of their own volition to finance their retirement, which argues for some form of auto-enrolment or compulsion.
Challenges for financial services
For the financial services industry, the challenge remains to produce affordable retirement solutions both for those who do work continuously until retirement, as most people do now, and for those who break their careers up into shorter segments. The latter pose a particular challenge by requiring greater flexibility in savings schemes to accommodate prolonged breaks in contributions.
The 100-year life, lived in good health, will be a reality for some, and we already see in the softening of traditional boundaries between work and retirement a glimpse of the lifestyles the authors anticipate. But the retirement industry must continue to work on producing practical solutions for financing retirement for those not fortunate enough to enjoy the charmed lives Gratton and Scott envisage.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.