How AI could help modernize pension and retirement systems

Lifespans and the cost of living are rising beyond what retirement income systems were built to support. Demographic ageing, along with decades of declining birth rates, is profoundly impacting the economic and social foundations of many countries. Living longer is a remarkable achievement, but how do we fund these extra years?

Covering basic expenses could require people to work longer, save and invest more aggressively or adjust their standards of living. But artificial intelligence (AI) may offer a remedy, potentially bolstering pension plans and social security in pursuit of better retirement outcomes.

In its Longevity Economy Principles report, the World Economic Forum in collaboration with Mercer reimagines the role of jobs, health and other drivers in building long-term financial resilience. To that end, finance and benefit leaders are exploring AI’s potential to address these challenges, aiming to improve modern pension systems, develop smarter investment practices and design better employee benefits programmes.

When it comes to addressing these challenges, there are countless variables to consider. Through a mix of predictive and generative AI, we may be able to better understand the drivers, features and potential outcomes of different retirement plans. One helpful starting point is the Mercer CFA Institute Global Pension Index, which (without the use or consideration of AI) rates these income systems in three key areas: adequacy, sustainability and integrity. Applying AI to each of these areas holds great potential. Here’s how.

Adequacy is the extent to which current retirement income provides financial security for today’s retirees. Some opportunities for AI to potentially improve retirement adequacy include:

Taxation support. AI could optimize tax incentives for plan participation.

Preservation. AI could curb benefits leakage by suggesting a minimum access age.

Vesting/portability. AI could help model different vesting and portability scenarios.

Retirement benefit design. AI could propose the optimal mix of lump-sum and annuity payments.

Separation. AI could suggest a fair division of benefits during a divorce.

Continued accrual. AI could assess the impact of benefits accruing when workers can’t work.

Changing demographics and economics may affect the long-term viability of pensions and social security systems. Some people could outlive their retirement savings by nearly 20 years unless they work longer or receive more support from these income systems. Add in other factors such as inflation and government debt, and it’s clear that the future holds a great deal of uncertainty.

AI has the potential to help facilitate future-focused decisions for more sustainable pensions and social security programmes. It may also be able to improve both productivity and labour market access across different age groups.

Running retirement income programmes with integrity means ensuring that members gain sufficient value at a reasonable cost and with full transparency. AI could boost plan integrity by improving cost controls, outcomes and member communications. It could streamline transactional tasks to make plan administration more affordable. Generative AI could even personalize member interactions for better value and understanding.

Ethics and integrity go hand in hand, and the potential use of AI in pensions and social security poses a number of ethical challenges. For example, there are questions surrounding whether AI should have the power to restrict retirement solutions for certain members, and what governance and human oversight might look like when it comes to building equity, transparency and accountability.

Investment returns are an essential source of retirement income. These returns depend on several factors such as investment strategies, economic conditions and government regulations.

Many investment professionals are exploring AI’s future potential. Research by Mercer suggests that today 91% of investment managers are either using (54%) or planning to use (37%) AI for investment strategies or asset class research. Investors are already using AI to analyze data, risks and trends, to identify patterns and market signals, monitor risks and predict behaviour.

The evolution of AI also poses new challenges in the investment space. Low-quality data, hallucinations and bad actors can all cause AI to fuel misinformation and disinformation, the number-one risk in the World Economic Forum’s Global Risks Report. Cyber risk is another key concern. It’s important to stay vigilant through robust governance and data security as AI gains traction.

People face complex financial decisions around retirement. It starts while they’re still in the workforce: which plans or programmes to choose, how much to save or contribute and, ultimately, the retirement goals they’re working toward.

Most workers don’t expect to make these important long-term decisions alone. Today, just 45% of employees globally believe they are saving enough for the future — and two-thirds are trusting their employers to help them plan for retirement.

Employers can use AI to help provide more data-driven education for employees, as well as cost-effective benefits programmes that address financial well-being. AI could help analyze each individual’s situation, guide them all through the benefits ecosystem and craft benefits communications that keep employees informed. Given the high cost of trusted financial advice, AI can also potentially improve access and outcomes for underserved populations who might otherwise make these decisions alone.

AI could potentially support modern retirement income systems, future-fit investment decisions and stronger employee benefits for lasting financial wellness. Yet even in the face of the challenges discussed here, there’s significant risk in trusting AI with too much too soon. All the systems and efforts that shape our health, wealth and careers demand human expertise, increased data security and robust governance plans.

AI is advancing every day, however. And while there’s still a long way to go, the finance and benefits leaders who explore it today will be firmly positioned tomorrow to reap the rewards.

With thanks to Graham Pearce and Jens Peterson, who made many valuable contributions to this article.

For more on this topic, explore the Mercer CFA Institute Global Pension Index.

https://www.mercer.com/solutions/investments/important-notices/