Episode 91 – Demographic Deep Dive

What is the Demographic Experience Study and how does it influence Washington State pensions? We sit down with Frank, one of the actuaries who worked on the study. Turns out, there were small shifts in male and female life expectancy and a trend toward later retirements for many eligible workers. We’ll explain what those findings mean and how they’re used to ensure pension funding stays on track.

View the survey: 2019-2023 Demographic Experience Study

Episode transcript:

[music intro]

Jenny

Welcome back to Fund Your Future with DRS. Today we’re taking a deep dive into the Demographic Experience Study, which is a report that was released by the office of the State Actuary. Here in Washington state, and we’re looking at how it impacts state pension plans. And we’re excited to welcome one of the actuaries who worked on this report. Frank, welcome.

Frank

Thank you. Jenny. Hi, Jenny. Hi, Seth. It’s a pleasure to be here today. I’m excited to have the opportunity to talk with you both.

Jenny

Perfect. So just to kind of get us started, what exactly is a demographic experience study? What are you studying and how often do you release this report?

Frank

Yeah. So, a demographic experience study is a report that takes a deep dive into the behaviors of a population. So, in this case, the population we’re looking at are the members of the DRS’ six main retirement systems. And the behaviors as I put behaviors in air quotes that we’re referring to are things like how likely are members to quit their job or when do members typically retire?

And we put all this information together to then try and develop a set of assumptions that will allow us to model how members might behave in the future. So, yeah, there’s a lot that goes into it, a lot of analysis, a lot of time with regards to how often we perform this study. We’re required by law to revisit this study once every six years.

And I think that strikes a good balance between making sure we’re looking at the assumptions fairly frequently and keeping an eye on them, while also recognizing that a lot of times, behavioral changes can be a little bit slower to evolve and takes a couple of years to kind of play out.

Seth

So, Frank, one of the reasons we wanted to have you on to talk about the demographic experience study is, at DRS, we sometimes receive questions from people about how do we know that things are on track with the retirement plans? There’s always questions about funding, and we’ve had other actuaries from your office on to talk about that, Matt, the State Actuary was on episode 54 and Mitch was on episode 33.

But could you just tell us a little bit about why it’s important to do this sort of study, and then how the report is actually used in your office going forward?

Frank

Yeah, happy to. And at this point, to really quickly before I get to the answer to that, I should share that, over the course of this podcast I might be sharing some opinions. Those opinions are personal. They’re my own. They don’t necessarily reflect my employer, the office of the State Actuary. But, Seth, to answer your question, I believe one of the key reasons for this study is so that the state can make informed decisions and plan for the future of the retirement systems.

So, what do I mean by that? Well, one key piece of information in planning for the future is to have a picture of what that future might look like. How might that play out? In this case: What might future member benefits look like? So for example, if let’s say you have a 40 year old teacher currently working for one of Washington’s public grade schools. In order to estimate their future retirement benefit, we need to estimate the probability that they’re going to stay with their job until they’re eligible to retire, and then when they are eligible to retire, when do they actually retire?

At what age? And then how large would their pension benefit amount be? And once they do retire, how long will they live after retiring and be collecting pension benefits? Many of those estimates are based on assumptions that are covered as part of this study, and those benefit projections are produced across all the retirement systems, and they allow us to combine that information about the benefits with the assets to assess things like a plan’s funding progress. Is it on track and then what are the contribution rates for the plans? Are the contribution rates, you know, in a position where they need to go up or down to account for maybe larger or smaller amounts of benefits being paid in the future or sooner or later?

Seth, did I answer all your questions there? Or was there another component?

Seth

No, I think that’s great, and we’ll get more into depth about what those different assumptions are and how they’ve maybe changed based on what you’ve seen in this study.

Jenny

So obviously, there’s a lot of data within these reports. All of the things that you just touched on between members and contribution rates and death and all these things. And what would you say is probably your top, maybe the office of the State Actuaries,’ top two takeaways from this study.

Frank

So, one of the top takeaways is around the mortality assumptions. So how long people will live. And that tends to be, in the retirement systems, it’s one of the most impactful assumptions because you know what determines how long members will be receiving pension benefits. That’s an important amount of years. We don’t want to undershoot it. We don’t want to overshoot it.

We want to try and get a reasonable estimate of that. And so, as part of this study, one of the takeaways that we had was that on average, females live longer than males. I don’t know if that’s necessarily new news. It’s something that we’ve seen historically and that was reflected in our old and new assumptions. But one of the things that we recognize this go around is that, female life expectancy generally came in a little bit shorter than we previously expected.

Male life expectancy, on the other hand, came in a little bit longer than we expected. So, you can kind of think about it is like the gap between male and female life expectancies seems to be shrinking a little bit. So, I did pull, I’m a numbers nerd and so I find numbers helpful to kind of, you know, paint a better picture of things.

So, I did pull just a couple of numbers related to this concept. So, if you have, for example, two 65-year-old retirees, one male and one female, let’s say they both work for the Public Employees Retirement System. For the male member our old assumptions projected the member to live until about 86 years old, whereas our new assumptions project a male member to live to about 86.5 years old.

So roughly six months longer. For a female member, under our old assumptions, we assume that females live to like roughly 89. The new assumption is like 88.8. So again, the numbers are very close, but about two months shorter life expectancy for females under our new assumptions. And again, mortality is one of the more impactful assumptions that we have in our experience study. So they’re small changes, but they do have an impact across the entire retirement system.

Jenny

And if I can just jump in a little bit to you’re saying that this report comes out about every six years. So here we are in 2026. Looking back six years, I can guess that maybe the pandemic had a large part to do with those numbers.

Frank

Yeah, you’re correct Jenny. The Covid pandemic did certainly play a role in our study for some assumptions more than others. Mortality and longevity was one of the assumptions that it had a more impactful assumption. And so we pulled out those years, you know, 2020 to 2021, 22. We gave those extra close consideration this year. And I should say at this point, that the mortality rates that we use are developed by an organization called the Society of Actuaries.

They develop mortality rates using public pension plan retirement data from across the United States. And so they have access to far more data and information than we do, of course, because they’re pulling from a lot of different pension plans. And so we use their mortality rates. We looked at them to make sure that they were a good proxy for members in Washington state.

We found that they were. So those are the rates that we decided to use. And yeah, when they developed their updated mortality rates, they actually excluded data from 2020 and beyond because those years had higher rates of mortality, most likely due to Covid. And it wasn’t seen as indicative of long term future experience. And so for that reason, that data was excluded. A couple of years from now, when they revisit their study and we revisit ours, we’ll look at that data again more closely and see if things have changed and see if there were any long term impacts from the Covid pandemic on mortality.

Jenny

Okay. That’s great. Thank you for that. And then what were some of the other takeaways from this study?

Frank

Yeah. So, another big takeaway was in the retirement space. What we found was that members who are eligible for early retirement in many of systems. And as a reminder, in order to be eligible for early retirement, a member needs to have a certain number of years of service, usually at least 20 years of service. But those members who are eligible for early retirement in many of the systems seem to actually be delaying their retirement later than what our old assumptions expected.

Now, one of the fascinating things about this study is we get the data, we analyze it, it tells us what happened, but it doesn’t tell us why that happened. And that’s something that we’re always super curious about, right? We want to know why are we seeing these changes that we are. And unfortunately, you know, it would make our lives so much easier if the data came out and told us, well, here’s why I retired early or here’s why I retired earlier. It doesn’t.

But in this circumstance, one possible reason is that members who do retire early, they incur a reduction in their benefit for, you know, the opportunity to retire early. So, one of my thoughts is that maybe members are looking at that reduction and saying, you know what, I’ll wait to retire for another year or two so that I don’t incur maybe as large of a reduction in my benefit.

So that’s what we’re seeing in the plans in general. There are some exceptions. So, for instance, our Law Enforcement Officers and Firefighters Plan, LEOFF Plan 2 specifically, they appear to actually be retiring a little earlier than we previously expected. So, they’re kind of going in the other direction. And again, the data doesn’t tell us why that happens. But one of the things we’re thinking there is that they had a benefit improvement that was passed a couple of years ago that increased their benefit calculations for certain years of service.

And so perhaps those members are feeling like they’re in a better position to retire a little bit earlier than they previously expected because of that benefit improvement. And perhaps they’re opting to retire a little bit earlier.

Seth

I really appreciate how readable this study is. If people really want to jump in, and I read the executive summary right before, and one of the things that stood out to me was something called the termination rates, an assumption. You can correct me if I get this way wrong, but that it’s people leaving the plan and not taking a pension, so people leaving before they’re eligible for a pension, or people leaving and taking their contributions out and not collecting a pension.

And my reading of this is that people are doing that more frequently than you previously had assumed. Did I read that correctly in your report?

Frank

Yeah, yeah, you got it Seth. So, our termination rates, which as you described, you know, termination could be people that quit their jobs, that are fired, that go on and take a job somewhere else. Those termination rates were across all the retirement systems. They were a little bit higher than what we previously assumed. And so, you know, it’s part of kind of a subset of that assumption, Seth you touched on this, is when members do terminate, they have depending on what retirement plan they’re in, they can have the option of either withdrawing the money that they’ve contributed to the plan over their working career, or they can choose to leave that money in there, wait until they’re old enough to be eligible for retirement and then elect for an ongoing pension benefit.

So, they have those two choices. And what we found there is that over time, it seems like more and more members are opting to take that second route to leave the money in the plan and elect to receive an ongoing pension benefit. And again, why might this be the case? It could be because I know the DRS has a great Education & Outreach program and so maybe members are becoming more informed about the value of that ongoing benefit compared to withdrawing contributions.

And with that additional knowledge, over time, more people are electing to go that route.

Jenny

I like that. That makes our jobs seem like we’re making a difference out there. Having an impact.

Seth

Well, and speaking of impact, Frank, so we’ve talked about a couple of different assumptions in the data that you’ve seen. And maybe I just want to reset the conversation and remind people that the actuaries office has set these assumptions. And then you’ve gone back and looked at the data for the prior six years to see, did the actual behavior match our assumptions, or how did it vary from our assumptions.

So, what are the results, that are expected to impact people that are currently working in the systems based on the study, what sort of impacts are we going to see from this?

Frank

Yeah. So, for members that are currently working for one of the DRS plans, this study does not impact member benefits. So, you know, when they go to retire their calculations won’t be different because of this study. It’s really this is an exercise in trying to predict if you will have members might behave in the future. And we use that information in a couple different ways.

But one of the more impactful ways is when we go to calculate contribution rates. Those are the rates that are paid by DRS members in a Plan 2 as well as employers of all DRS members. And so, by informing those contribution rates, depending on if, you know, future experience ends up being, you know, more costly or less costly than we expect, contribution rates could move up or down.

Ultimately, at the end of the day, the long-term cost is going to be decided by members and the choices they make when members ultimately do decide to retire. But again, we’re just trying, in lieu of being able to ask, you know, all DRS members: “hey, what are you going to retire?” We have to make assumptions about it and try and predict across the population when it will and informs things like contribution rates.

Those rates are charged to active members into DRS plans. Those who are active Plan 2 members in the DRS plan so they will potentially feel the impact of this study through higher or lower contribution rates.

Seth

So, can I maybe drill down to a real-life example based on what we previously talked about Frank? If people on average live a little bit longer, we would expect that we would need to collect more contributions to pay for those future benefits. And if people live a little bit less long, if they die sooner, than we would expect contribution rates to go down a little bit, we would need to not put quite as much money into the retirement plans.

Is that a fair explanation of the sort of small tweaks that your office would make in recommendations for future contribution rates?

Frank

Yeah, that’s a great summary, Seth. I think that encapsulates it really well. And then, yeah, we like to say, you know, we don’t know if our assumptions will be high or low in the future. The one thing we do know is they won’t be exactly right. If they were exactly right, then I’d be out buying Powerball numbers right now.

But they’re not. Right? Each person is unique, they each make different decisions. They each have different lifestyles. And so we’re just trying to look at the population as a whole, get a sense for that and evaluate it. Like you said, Seth, we might be high, we might be low. And so, you know, over time, that’s part of the value of revisiting this study once every six years is to check back in and see, you know, okay, we expected members to live longer.

Are they living longer? Are assumptions well set, or not? A lot of times those things take many, many years, more than six years to evaluate. But we’re going to keep an eye on them to make sure the contribution rates we calculate, our best estimate if you will, of what future plan experience will hold.

Seth

I really appreciate that because I think that’s one of the things we hear frequently is, and there’s no reason people who are just in the retirement plan should know that there’s all these people working on studying the retirement plans, but there is this course correction that happens, you know, every two years or every six years, depending on what exactly you’re looking at or thinking about.

But there’s this slight adjustments that are being made to make sure the pension plans are staying fully funded.

Jenny

And then what about for those members who are already retired, does this sort of study have any impact on those folks?

Frank

No, it doesn’t impact them. It’s informational, I guess. If you’re curious, we very much encourage you to read it. But no, as I touched on a little bit earlier, this study does not impact the benefits that retirees are taking home. So, it’s completely unaffected by that. It has no impact on the actual benefits that individuals receive.

And because retirees are no longer paying contribution rates, they aren’t impacted by that side of things that either. So no, retirees are unaffected by the results of this study.

Seth

Can I ask one more follow up questions about the impacts? Because I don’t think we totally touched on this, but one of the things that your office provides us are administrative factors, and we’ll probably have another episode where we’ll dive more deeply into what that means. But when a person retires, as you were saying, their pension benefit is just based on the years of service they work and their average salary.

What we’re talking about today doesn’t change that. But, I can choose to have a survivor option. I can choose that if I pass away, my spouse or whoever I choose will continue to receive a monthly amount for the rest of their life. My understanding is that these assumptions do have some impact on those sorts of factors. Is that right? And could you give us a little bit more information about how that works?

Frank

That’s a great point, Seth. Yes. So, when members at the point of retirement, they have some choices to make in terms of, you know, how they’ll receive their benefit, like you said, that one of them is electing a survivor for their benefit. And when you do so, that benefit is reduced because now the member will no longer be the sole receiver of the benefit.

But when they pass away, it’ll get passed along to their spouse or the beneficiary. And we have a term that we call actuarial equivalence. And what that means is that, across the population as a whole, we want to make sure that a member that is electing either of those two choices, you know, someone who is electing to receive a benefit just as a single life, just them versus someone who’s adding a beneficiary that when you add up the future value of their benefits and put it in today’s dollars, that those two are apples to apples across the plan as a whole.

So yeah, one of the factors that influences that is mortality. Let’s say you have a male retiree with a female spouse. How long will that member live? And then if their spouse outlives them, how long will that member’s wife live beyond that? And, yeah, the mortality rates play a huge role in calculating the impact of those reduction factors, those joint and survivor, as we call them, reduction factors.

Seth

And I imagine that calculation gets quite complicated quite quickly, as you were talking about male life expectancy versus female life expectancy. If the plan leans more male or more female as far as what their membership is as well. So, there’s a lot of different things that, your office is taking into consideration. Frank, is there anything we haven’t touched on that you want to make sure our listeners know about the demographic experience, study in the work that your office has done on it?

Frank

Yeah, I think we covered a lot of the high points of it. Our demographic experience study is now publicly available on our website. So, we encourage your listeners to give it a read. It is a lengthy report, but Seth, as you were so kind to mention early on, we really focus on the first handful of pages, what we call the executive summary, trying to pull out the key impacts from the study and plain talking it, not making it super jargony and all these actuarial terms that have your head spinning.

We really do try to put a focus on that. And so the report can be found on our website which is leg.wa.gov/osa. We have a studies page on there that includes this demographic experience study we’ve been talking about, as well as some other reports our office works on.

Seth

One other thing I want to plug about this study to Frank is that not only has your office spent quite a bit of time working on this, but then there’s an outside actuarial firm that comes in and audits your work and gives it its seal of approval. And I just try to reinforce to folks that there’s a lot of different people looking at this and making sure that it’s well done and well thought out.

And as you said, it can’t be perfect. It can’t predict the future. But it is all very reasonable and really up to the standards that the actuarial profession, requires. So, I just want to make that plug for your office.

Frank

Thank you Seth. I appreciate it. Yes, with this study, there’s a lot of science involved. And by that, I mean, you know, looking at the data and the story it’s been telling over the years. There’s also a fair bit of art involved, too, because, you know, we’re thinking about the fact that just because members have behaved a certain way in the past, does that mean that they’re going to behave the exact same way in the future? Or, might their behaviors change due to things like, you know, new laws or, benefit improvements, things like that.

So, we do welcome within our office, there’s a lot of members of our team that are working on each of these assumptions, contributing it to make sure they’re as well thought out as they could be. And then, like you said, we also have an independent outside organization auditor that’s also coming in looking over the work that we did and providing their input as well.

Jenny

Yeah, it’s super fascinating. Thank you for coming on to the podcast and sharing all of this. I hope that our listeners will be interested. And certainly if they’re data nerds, like all the rest of us here, hopefully they will click through to that report and we’ll make sure to include a link in the podcast description. And I hope I’m still around in the next six years to see what the next report around is.

Frank

Yeah. There’s a lot of work our office has to put into the study, but I personally find it genuinely interesting to kind of try and better understand a population and how it’s changing, and also make sure we’re putting the pension plans in a good position so that our decision makers can have the best information that we can provide to them available when they’re making decisions like contribution rates and, all the other important factors that go into running a retirement system.

Seth

Thanks, Frank.

Jenny

Yeah, thank you so much.

Frank

Thank you Jenny. Thank you Seth. It’s been a pleasure.

[music outro]

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