Episode 053: Moshe Milevsky
Finance professor Moshe Milevsky studies personal finance and retirement planning, focusing on a simple question that matters to each of us: How can you make sure your money lasts as long as you do? The answer that the world of finance gives us is to share that risk with as many people as possible. Moshe doesn’t agree with the assumptions behind this answer. In this interview, he talks about what we can learn from the world’s first pension plan, which began in Scotland in the 1744 and lasted until 1995. Risk sharing is not about large numbers of people, he says. It’s about solidarity with others in your community.
Moshe: My name is, Moshe Milevsky, sometimes Mosh or Mo, depending on who I'm talking to. My day job is teaching undergraduate and graduate students at the Schulich School of Business within the Finance area. I teach courses on wealth management, insurance, pensions, retirement income planning. And I have recently been appointed as the CIT Chair in Financial Services at the Schulich School. So that would be what's on my business card.
Cameron: Moshe, welcome to the podcast.
Moshe: Thank you.
Cameron: So tell me a little bit more about the courses that you teach. You're dealing with a younger group of students?
Moshe: I am. As I'm sure you know, we tend to specialize when we teach. And once we've taught something and we're good at it there's economies of scale there. So the course that I've been teaching over the last few years is on personal finance and wealth management to third and fourth year BBA students.
It's actually a two part course. In the fall it's Finance 3050, which is basically an introduction to wealth management. And then in the winter I do an advanced course that builds on that, that's on retirement income planning. So I would say that my specialization when it comes to teaching is wealth management, personal finance, financial literacy, specializing on younger individuals, younger students.
Cameron: Hmm. That's interesting because younger students don't often feel a pressing need to talk about retirement.
Moshe: They don't. And in fact, that is one of the most challenging aspects of teaching BBA students pensions and retirement planning. They don't see the relevance to them. And initially it was difficult because, you know, obviously enrollments were low and it just didn't grab them.
But over time, the way I present this is sort of first of all, this is relevant to the people around you. You'll be a lot more popular at the dinner conversation when your parents and possibly grandparents bring up questions about CPP and OAS and RRIFs and retirement.
And that, that's one aspect that, that's a hook that grabs them: "Oh, yeah. Maybe my parents will finally listen to me for a change." So that's one of them. And the other one is that what I try to do is I try to convert these topics into more technical problems. So even though they don't really appreciate the motivation, they don't have money, they don't have much in their RRSPs, but when you present it as a technical problem that they solve with coding and programming and algorithms and AI and, and various spreadsheets, they see, ah, okay, I get it. You know, this is an interesting technical problem as opposed to something that they feel pressing in their life. But you hit the nail on the head that one of the challenges of teaching a course like this, is that it's just not very immediate and relevant to them.
Cameron: You do have the advantage though that this course is directly within your wheelhouse in research.
Moshe: Yeah, it's unclear what came first, the chicken or the egg, right? Are you teaching something and spending a lot of times with students and then you gravitate towards things that are relevant to that? Or is it the other way around? Did you tilt your teaching towards the things that interest you?
But yes, I would say that there's definitely an overlap between the articles and the books, and the teaching that I do. I'm fortunate in that way. A lot of times, people are assigned courses to teach, that have very, very little to do with the things that they're passionate about.
And I'm glad that there's an overlap there.
Cameron: Yeah, well, it's good for the students and good for you. Today I want to talk about the most recent output from this fantastic career you've had at researching around pensions and savings and wealth management and all those, really intriguing topics that have to do with everyday life. They're not just abstract problems, but they're very much about everyday life.
And in this book, you're going way back to everyday life for people in the 1700s. So let me read out the title of the book and then you can tell us more about it. It's called The Religious Roots of Longevity Risk Sharing: The Genesis of Annuity Funds in the Scottish Enlightenment, and the Path to Modern Pension Management.
Moshe: Yeah.
Cameron: The part that really leapt out to me as a former Presbyterian minister in training is the Scottish Enlightenment part. Tell us how you came to be studying this topic.
Moshe: First of all, let me just back up a bit. I if I could summarize my areas of interest with, you know, one sentence, a tweet, it would be, I am interested in helping people make sure that their money lasts as long as they do. I want to make sure your money lasts as long as your life. That's very different than saying, I want to help you make more money. You don't want to die with too much leftovers because it's not very efficient from a tax point of view and from a utility point of view. So I want to make sure your money lasts as long as you do. Anything that is remotely connected to making sure your money lasts as long as you do, is something that interests me. So that's sort of the background, and that's a summary of, you know, 20, 25 years, 30 years of writing. So now let me answer your question. How did I get into this Presbyterian, Scotland, enlightenment? I mean, what in the world does that have to do with, with pensions. So, during COVID, we are stuck in our houses, in our offices, in our rooms.
We're teaching courses online but we can't go anywhere and that gives us a lot of time and, many of us reoriented ourselves. We learned new skills. We embarked on projects that we wouldn't have otherwise. The project that I decided to embark on, something that had always interested me, was history. And I enrolled in a course, a series of courses and a program. Everything had gone online. The University of Edinburgh in Scotland has a very good program in history. So I enrolled in that and I started a master's in history. Technically the Department of History, Classics and Archeology
And I had to write a thesis. And the question was, what would I write a thesis on in history? And by chance - this is really you know, happenstance - uh, one of the faculty members in the history department there, he said to me, “Hey, you're into pensions, right, Mosh?”
“Yes, I'm into pensions.”
“There's this very large collection of documents that the National Archives have, which is literally two blocks away, that the Presbyterian Church of Scotland gave them many decades ago about the world's first pension fund.”
And I said, like, “You're kidding me. What? What is this about?” And that sort of led to a lot of research on this and reading and then access to the archives. And apparently nobody had really looked at it from the perspective of finance and actuarial science and mathematics and retirement planning, which is what interested me. So I wrote a master's thesis at the Department of History, Classics and Archeology. I've got this thesis and I said, you know what? A thesis is not enough. I want to turn this into a book.
So that is the long-winded background to why I got interested in Presbyterians and Scotland and the Enlightenment.
Cameron: So what did you discover? What was this pension thing about?
Moshe: Yeah. So I think the word discovery is a little bit overused. Especially, you know, one of the things that they train you in history and archeology, you know, you're not Indiana Jones, You don't go into the archives and, oh my goodness, look at this. Look at what we found. It changes everything.
Cameron: The University of Edinburgh didn't have a course on how to crack a whip?
Moshe: Yeah, they have some interesting courses. Mind you there a lot on witchcraft, oddly enough, and, magic in the 18th century. So there, there's quite a lot to do there. Maybe they have one on whips, but the issue here is that you have to come up with a way to merge documents that other people have seen before.
It's not that these things were, you know, hidden in a crypt or a vault, and I'm the first to see them. But to look at this from a slightly different perspective, to talk about it in a way that hasn't been discussed before. After all, this is a plan that existed in 1750.
Others have written about it, but to approach it from a different angle. If there was a discovery, and I'm very careful with that word, if there was a discovery, is that as I was going through the list of all these ministers in the Church of Scotland in the 1740s and '50s that participated in this scheme, in this pension fund.
The Muir portrait of Adam Smith, painted posthumously.
(Source: Wikimedia, public domain)
I came across, oddly enough, the name of Adam Smith, who was an economist at the University of Glasgow. And I said, well, that's very odd. First of all, Adam Smith wasn't a Presbyterian minister. More importantly, why are there professors on a list of church ministers contributing to a pension fund.
So that led to some articles and research that most people did not know about, about how professors petitioned to join this scheme because of the fact that Maclauren, who was one of the mathematicians involved and they said, Hey, this is a good idea. You might want to add to it.
So it was fun to come across names that I had heard of in a different context, all participating, in this pension scheme. So I think that was the, you know, the discovery or the excitement of, "Oh my goodness, Francis Hutchinson, the father… and, like, he contributed?"
No, he decided he didn't want to contribute. He abstained from the plans. So kind of getting into these personalities and what led them to go in and to go out, the rationales they provided.
Cameron: Well, I know that a lot of the book is looking at, trying to understand the different choices that people could make with various options within the plan. But maybe before we get into that, you could just give us a basic idea of what was the structure of this particular scheme or plan.
Moshe: Yeah, so it, it was actually rather modern, and I'm using that word carefully, as well. There are a lot of features that we think were invented, developed, first implemented in the 21st century, and in fact, they were all sitting within that scheme. So let me explain how this scheme worked. So the idea was that a minister and a professor that had a regular salary would join a plan that would force them to contribute a certain percentage of their salary to this plan, and in exchange, if you were to pass away, your spouse or your children, will be entitled to an annuity for the rest of their lives. So the way to think of this is it's a pension plan, it's an annuity scheme, but not for the ministers and the professors!
For the spouses of the ministers and the professors as well as their children, in the event something happens to the workers.
So it's an early form of life insurance except that the life insurance was paid in the form of a pension. The technical word is reversionary annuity. So that's how the scheme worked.
Anybody that joined after 1744 was forced to participate in this. Anybody that was working prior to 1744 had the option of opting out, and I could talk about later people that opted out. The only choice people had was, Hey, how much do you want to contribute? There were four categories. You can contribute a lot, fairly large percent, like maybe even 15% of your salary, or you contribute a little, 3% of your salary. It was up to you. It was irreversible. Once you pick the category, you have to stick with that the rest of your life.
And of course, the higher your contribution rate, the better the benefit would be to the spouse and to the children, in a mathematically strict relationship that had been developed by Maclauren, who was a student of Isaac Newton, So that's in essence how this plan works. Think of it as an RRSP. You contribute money. In exchange, your spouse gets money for the rest of their lives. That's the high level summary.
Cameron: Mm-hmm. So this is a way of solving a particular social problem at that time, which is, the destitution of widows and orphans.
Moshe: Yeah, it, it was, and you know, there were a number of different schemes that had been proposed or ideas that had been proposed. There's the Elizabethan poor laws that go back a hundred years before that, where parish by parish, they had to do that. I think, and you know, there is some documentary evidence to support this that this was driven by spouses who said to their husbands, right, the ministers and the professors, "Hey, if something happens to you, what about me?" You know? And they come home to that day in, day out. They say, "Okay, okay, I'll, I'll talk to someone in the church." And I think that it was driven by women. And in fact, there's a lot of other research that's been done that shows that life insurance industry was really developed by women who said, "Hey, come on, what if something happens to you? What about me?"
Cameron: You mentioned some things just now about the structure of the church at the time, and I wonder if you could tell me about the connection between, this actuarial idea of a pension and the different structure that this particular church, the Presbyterian church or the Church of Scotland had, compared to the hierarchical Catholic church.
Moshe: Yeah, so, you know, I'm not an expert on Presbyterians.
Cameron: I am!
Moshe: Well, that's good. So you can correct me, right? I studied in Yeshiva until I was 20, so you know that they don't teach this in Yeshiva, but what happened?
First of all, you have to understand, Catholic priests don't marry, so they don't have a spouse to go get a pension, right? So that's why, John Knox and obviously Calvin, you know, as they introduced these reforms after Luther and the Reformation, one of them is that ministers can marry. So it's natural that a church starts to think about, Hey, there's somebody else here besides the preacher.
I think that because of the hierarchical structure, and the tight control of finances that you saw within the Presbyterian church, it was easier to set up a fund like this. Alexander Webster, who was the force behind this, in terms of getting the data that he needed to be able to manage this plan. This was developed in stages in the 1720s. The Church of Scotland tried to do it presbytery by presbytery, and it was just too small for it to work. They weren't able to diversify risks. And it was only in the 1740s that the idea came, “Hey, let's go national, let's do this much larger.”
You now have thousands of people potentially, and you're able to diversify risk. I would definitely agree that the church structure and specifically the Presbyterian church structure in Scotland is what enabled this scheme to be successful, for hundreds of years, mind you. This was wound up in 1995 and merged into some other funds. So not only was its origins interesting, its longevity and success were interesting.
Cameron: There's something about the somewhat more egalitarian structure of the Presbyterian church that is connected to the mathematical models behind these pensions. And the first section of your book I found very provocative. The title you've got to that first section is, "Do you believe in pensions?"
And that's really a curious question to ask because we think of pensions as just this calculative thing. A calculated amount is specified in the amount that you have to contribute to the fund and a calculated amount is received later on.
And the idea of beliefs doesn't seem to enter into it at all. But you're saying that that's fundamental to understanding pensions.
Moshe: Yeah. if I can start, delving into the weeds of the book I think you need two ingredients. You need the mathematics, which you've just described, the inputs and the outputs, and to make sure that it's actuarially balanced. But you need to have people buying into the idea that they're willing to subsidize others.
They are in a group where you may not be getting a very high rate of return, but you're participating in this out of solidarity. And I think that's where the church came in as well. One of the issues with the fund was that everybody was contributing the exact same amount, once they decided a high percentage or a low percentage, regardless of age. So whether you were a new minister joining at the age of 25 and you just got your first position, or you were in your sixties, you were paying the exact same rate and the benefit to the annuitant or to the spouse was the exact same as well.
Cameron: Just to clarify that, Moshe. So you're saying that, um, if I'm 60 years old and I enter the plan and I contribute at the 25 pound rate, I get a specific annuity, and if someone is 25 years old and starts paying the same rate, they pay it for many, many more years, and at the end, their spouse gets the same annuity, even though they've paid many, many more years.
Moshe: I know. Sounds unfair. And that's exactly what people complained in the 1740s. You can take a look at the Edinburgh Gazette and they're actually letters like, "Hey, this is not fair. This is not fair." The way they phrased it is the older people are taking advantage of the younger people. Right. If you think about it that way, if everybody gets the same rate. Nowadays that's not how insurance works. The older you are, the more you have to pay for life insurance because you're more likely to pass away. So here's where the response is, and here I think is one of the details that really get to the essence of the plan.
Alexander Webster, I consider him the COO of the fund, sends a letter back to the person who complained and said, look, I spoke to the younger brethren and they are willing to participate in this knowing that they are not getting as much as their older brethren, out of solidarity and care and communal understanding, and because of the fact that they know that if the situation was reversed and the older person was the younger one, they would've done the same.
Cameron: Mm-hmm. Mm-hmm.
Moshe: So there was a clear understanding as, yes, there's a subsidy here, but I mean, this is the person that taught me how you know, how to say the Westminster Confession of Faith properly.
That's one of the reasons this fund worked, is because people did the math, realized that there's a little bit of unfairness and said, you know what? I'm in anyway.
Here's another proof of this. Ah, this is obviously speculative. Adam Smith participated in this. Adam Smith. He participated in this. He had no choice because he joined the University of Glasgow in the 1750s, but he had a choice at what level to contribute. Does he contribute the high amount or does he contribute the low amount? So let me ask you to guess, give me a hypothesis, what he contributed.
And I'll tell you two things about Adam Smith. He never married, ever. And when he joined, he was in his twenties.
And he's a smart guy.
Cameron: Yeah.
Moshe: What do you think Adam Smith does? The Wealth of Nations!
Cameron: Adam Smith is famous for this idea of free markets and everybody makes their own choice. And you know, I don't know whether he would use the phrase "utility maximization," but basically everybody makes these choices and then magically, somehow it works out to the common good.
Moshe: Yeah. So what?
Cameron: Obviously he would contribute nothing because he's got nothing to gain from it.
Moshe: So he couldn't contribute nothing because it was mandatory to contribute a little bit. A little bit. But you're saying he would contribute the least he has to?
Cameron: Yeah, of course.
Moshe: Adam Smith, and I've got the picture in the book, contributed at the highest possible rate.
Cameron: What a nice guy!
Moshe: Now, so this gets us into something else. Most people know Adam Smith as the author of The Wealth of Nations. If you ask historians, they like his other book, The Theory of Moral Sentiments.
Theory of Moral Sentiments, which he wrote 10 or 15 years before, is almost contradictory to Wealth of Nations.
In fact, some German historians in the 19th century called it "Das Adam Smith Problem" because it's completely inconsistent. In The Wealth of Nations, he's this cold calculating rational utility maximizer, although that's a term from Bentham a hundred years later. But in The Theory of Moral Sentiments, it's always about doing good and helping others`, and we need that moral sentiment ... Adam Smith was behaving based on what he discussed in The Theory of Moral Sentiments. "I know the rate of return on this thing isn't good. No, I know the IRRs are lousy, but I'm doing this out of solidarity with all my other colleagues at the university. I've learned from Francis Hutchinson, who's much older." Do you understand what was driving this? Solidarity.
The problem is, and this is the practical part of the book, because up until this point, you'll wonder how in the world does this have anything to do with pensions in the 21st century? The practical aspect of this is that this solidarity is breaking down Nowadays, these funds are enormous and I have no idea who I'm subsidizing and I'm terribly upset about it. If you have a low life expectancy, you are in poor health, you're diagnosed with a ..., you're a male, and your life expectancy...
In the CPP as just one example, the Canadian Pension Plan, you're going to be paying in for many, many years. You're not going to get very much. Your IRR will be negative in real terms, and we can do the math and I do it with students. If you are lucky enough to have been born from genes that come from Scandinavia, you're female, just as an example, and your longevity is a hundred and your, your grandmother is still alive at 115, you're going to get a phenomenal rate of return from the CPP.
How are we going to continue to justify, and pensions are just one example, pooling in a world where I see very clearly, I'm not winning from this. Car insurance and home insurance is another example. We pay an astonishing amount in home insurance. If you add up what you've paid in home insurance over the years, it far exceeds any payouts you might have received if you did. But there are others that are claiming. Wait a minute. Is that fair?
And I think that as we start to realize that the solidarity breaks down, we have to start rethinking how pensions and annuities and insurance get priced and distributed and used. I think that's the practical message from this book, beyond the archives in the 1750s.
Cameron: Well, I want to turn to a very clear problem right now in Canada, which is the moves, the noises, let's say that the Premier of Alberta was making about carving up the CPP and creating a separate Alberta Pension Plan. Now, under the provisions of the CPP, any province can opt out and go their own way.
That's not, you know, particularly problematic. That's, that's allowed. But what's very strange is that Danielle Smith's calculations, that she asked to be done, claimed more than half of the existing retirement savings fund in the CPP for Albertans.
Moshe: Yep.
Cameron: And I want you to tell me why she's wrong.
Moshe: Yeah. So, you know, I'm smart enough and old enough to know not to take sides in this thing because...
Cameron: Oh, come on!
Moshe: I don't want to be, I do not want to be hired by Danielle Smith, and I certainly don't want to be hired by the Chief Actuary of the CPP, but let me give you some context here and understanding.
First of all, as you know, the QPP has their own pension plan.
Cameron: This is Quebec.
Moshe: Quebec. Right. So the idea that you can have a province do this is, you know, certainly acceptable. Let me also say this, that I think that it wasn't Danielle Smith who did the actuarial mathematics.
It was a consulting firm, you know, that they hired to do this. And as I'm sure you know, in this business, this all comes down to assumptions. And they made certain assumptions, and somehow these assumptions led to them taking 50% of the CPP.
I saw somewhere that if Ontario had done the exact same thing, they would take 60% of the CPP.
And if BC did the same thing, they would get 70% of the same, of the CPP.
So if you add all of this up, everybody has a claim on 400% of the CPP. So clearly their reducto ad absurdum here is that this, you know, this can't be sustainable. I think that… and again, I want to be very careful. It's not that I have a view one way or the other. This is part of a negotiating tactic. You know, if you are negotiating, I hate to use this word, think "Trump." You know it, it's all part of a deal. So if I am about to go to negotiate about how much money I'm going to extract, I'm going to come with the most aggressive accounting assumptions I can possibly come up with, 'cause I'm not subject to GAAP or FASB, right? I'm just using actuarial. And I'm going to push for a big number. And then when the negotiations come down to the, "Oh, you use that expected rate of return, no, maybe you should use this expected return," the number becomes more reasonable.
Cameron: Mm-hmm.
Moshe: Also, I think, and this really should wrap this up, most Albertans, when you ask them, they're not interested in this.
They, I mean, there were surveys that were done. Do you want the CPP to carve out a portion and give you, and you might get more, you might not get more? I don't think there's a lot of, you know, interest in this amongst the populace. Um, now I'd say that, you know, most people don't care about the CPP either.
They're like, I don't know what that is when, when I'm 60 years old, tell me about this.
Cameron: Mm-hmm.
Moshe: I mean, I know my 22-year-old BBAs, like CPP, who cares? So. There, there's an apathy towards that as well. But my, my response to your question is obviously they can't have 55% or 50% of the CPP because every other province would have the same claim, and there's no CPP left.
Cameron: Mm-hmm. Yeah, but it really comes down to the thing you pointed out about insurance, right? That we pay into let's say home insurance products. And unless your home burns down, you're not really going to get a good rate of return out of that, but you're insuring yourself against this catastrophic risk.
Moshe: Yeah.
Cameron: Right, and that makes sense within the confines of an insurance policy. It's, it's not… like, I don't mind if I have to pay for a plumber to come and fix a leak. I'm not looking for necessarily that degree of coverage. The deductible can be fairly high on my policy and I'm fine, but if the house burns down, I'm in real trouble.
So I need to be insured against that catastrophic risk. But with a pension, it's a little bit different, right? We're basically engaging in this contract with other people to say, we will pool our resources and look after each other in old age, and this, we're all going to suffer the same catastrophic event at some point, but it's a question of when.
Moshe: Yeah.
Cameron: Right? And so you get into this backward zone. Right, that what's good for you is bad for the plan, and vice versa, right? If you die early, that sucks for you, but the plan is happy 'cause they get all your money and they didn't have to pay it out. And if you live a long time, that's the longevity problem.
That's a real problem for pension plans as if people live a long time.
Moshe: Yeah.
Cameron: So it's the same sort of an issue, but it's on that it, that risk is spread out over many years. It's not just a single event like your house burning down. And I think that changes the way that we think about what it is that we're actually getting out of this arrangement.
Moshe: Yeah. Look, I agree with you. There's certainly differences between property and casualty insurance, where, you know, first of all, it's a completely different industry. P&C and life and health are, are, are completely separate entities. They're regulated differently, their accounting is done differently.
One-off catastrophic events, disrupt your life in ways that it's almost impossible to plan for, where by longevity, you know, you tell someone, look, you might live to 115, you might be 95. But I agree with you that there's certainly differences in the types of insurance policies out there.
And I think in all cases there's an element of solidarity. And I think that that's something that's very important for people to understand. And you know, as we become more quantitative, or at least as our algorithms become more quant, we're going to start to learn that, hey, even if your house burns down and the insurance company has to pay $3 million to rebuild it, add up all the premiums that you've paid in the last 30 years, adjusted for time value of money, you might have triple or quadruple paid.
So where did that money go? Well, to the insurance agent making very high commissions. Oh, okay. That's interesting. And to the insurance company with a, you know, return on capital or a return on equity. Oh, that's interesting. And to the fraud, right? All the fraud that we kind of take a blind eye to. Yeah. Fraud. Fraud is horrible. No fraud is costing you your premium. I think we start to rethink, Hey, is this the right way to arrange ourselves in our pools?
And I think one of the practical takeaways is maybe we should start thinking how small can we make our pools so that we keep our solidarity?
I know the people in my neighborhood, I know the people in my community. I know the people in my church, or my synagogue, or my mosque. Maybe that's the way to do this, where I feel more comfortable with the subsidy and the solidarity argument as opposed to this global entity where I don't know. Why am I overpaying?
Oh no, you're overpaying because your neighbor might...
I think we have to rethink insurance and with many products that way as we learn to compute even in the catastrophic scenario, what the IRR is.
Cameron: Mm-hmm. I just want to clarify something about this catastrophic scenario, 'cause it's not just the amount compared to the premiums that you pay in over your lifetime, but it's the timing of the catastrophe.
If the catastrophe happens before...
In the alternative scenario, you could have set aside your money and saved it up, invested it, and created a, a pool of your own money, right?
A fund of your own money to pay for the catastrophic event. But if the catastrophic event occurs before you've saved up enough money and your investments have grown enough, you've got a problem. So it, it's delivering a, a, a, a, a bit of solidarity through timing.
Moshe: Yeah. So I am ... I completely agree with you, and I want to be very, very clear. I spend the first hour of my lecture on insurance echoing your sentiment right now and explaining insurance. But when you take a look at the insurance products that are available to homeowners, it's very difficult to buy what you've just described.
Cameron: Hmm.
Moshe: If you go to the insurance company, you know, I don't want to name my company, although I'm dying to because they should be put, put on, you know.
But you know, when, when I say, Hey, you know, I want catastrophic coverage only, I want the highest deductible. I only want the absolute catastrophic coverage. I don't want to pay for all of this stuff.
They say, no, no, no, we don't do deductibles above ten, or we don't do $10,000. Like, I don't need a, I want a hundred thousand. Two hundred. I want a catastrophic coverage. Can't do that.
And when I say to them, I want to cap your payout so that you're not sitting here and arguing with contractors if something happens to my house, which is what makes the claim process so expensive.
When you break down, why is it so expensive? Oh, they have to spend years in litigation. Forget litigation. I want a parametric trigger. If there's a fire in my house that's stronger than a certain amount as determined by the fire, I want a pay out of $3 million. Finished. You don't have to argue with adjusters. Nah, no, we don't do that, Moshe.
Why not? That would make insurance a lot cheaper. That I think that's..
What I’m arguing, I love the idea of, of protection against catastrophic coverage. Give it to me please.
Cameron: Yes, but insurance companies don't have a vested interest in providing cheaper insurance. When you think about it, their entire business model is take people's money and don't give it back.
Moshe: Yeah. Yeah. And earn interest on it. And I think that that's part of the discussion. You know, let's go back to the 18th century, see how they did it then. There is no other area where you would do that. You know, Apple isn't sitting and saying, I wonder how they did iPhones in the 18th century.
But somehow when it comes to finance and insurance and protection and pooling of risk, there might be some lessons from how these things started out.
Cameron: You focused on the kinds of choices that people made, given some options within that particular pension scheme, the annuity scheme. What are the kinds of choices that people do get to make today in their retirement savings programs?
Moshe: One of them is the same choice that Adam Smith and Francis Hutchinson and all the greats in the Scottish Enlightenment had. How much did they contribute?
Do you want to? If you do nothing, if you do nothing, the default option is that they're going to take 4%. They had a default option also in 1744.
The default was the second category. If we didn't hear, remember, this is in Scotland, right. They had to give people six months to send in the mail. They sent in their notices and if you know your history at the time, the Jacobite Rebellion is taking place and Bonnie Prince Charlie is attacking Edinburgh.
And they said, no, no, you got to get your letter in. I don't care about no rebellion. If we don't hear from you in six months, you're going to get defaulted into the second category. And a lot of people were defaulted into the second category, but not as many as you see nowadays. The apathy that you see today in pension plans, they do nothing and they default into the default, didn't exist then. Nowadays, 50, 60% default. You never hear from them. Yeah, just do what you want to do. Then it was only, you know, 20, maybe even 15%. I would like to argue that in the 18th century people were more financially literate than they are today. Now you're saying, That's ridiculous. What, what was there to be literate about?
Relatively speaking. People paid attention to their money and they have to be more careful. The relative financial literacy was high and that's why very few people defaulted. No, no, no. I think I'm going to make my own choice here. I'm going to go with the highest category.
I'm going to go with the lowest category, or I'll contribute, I'll decide not to contribute. So that's an example of a decision that people make today, a decision that people made 280 years ago, and they seem to be making them differently.
Cameron: There's an interesting question here about why it is that people are so apathetic about this. One hypothesis might be that they have been conditioned to think that everything's just going to work out, the nanny state kind of an idea. Um, another would be the opposite of that, which is that they have lost faith in the system and they don't think that there's actually going to be much benefit for them down the road, that somehow this will all fall apart like everything else, like job security and so forth, has fallen apart.
Moshe: Yeah. I think another one is that this is just very boring. We might be fascinated by it, right? You've written articles on annuities and pensions. I've written articles. Fascinating to us, but. Most people, it's like, you know, get Kim Kardashian on your show. Maybe we'll pay attention.
Cameron: Who would enjoy that. Um, tell me about this phrase, longevity heterogeneity. What does that mean?
Moshe: Yeah. So you know, it used to be that, that longevity, how long we live was kind of this random variable. I don't know. We don't know. It's in God's hands to use a biblical term. But now we're realizing It might be in a test tube, and if we, you know, do the right genetic tests and we take the right fluids we might get a much better picture of our longevity. And some people are doing that. I mean, I did a test. I measured the length of my telomeres, which is just a fancy way of saying what my biological age is.
And my biological age was lower than my chronological age. In English, that means I have slightly better longevity prospects than the typical 58-year-old. So. Mortality, or longevity heterogeneity, to answer your question, is when you and I know a little bit more about our longevity prospects than everybody else does, and they might be better than everybody else in our pool. How would that be relevant? Well, hey, this is very interesting. So I have good genes. I've been taking care of myself. The biological age profile came back 10 years younger than my chronological age.
I'm going to be around a while, so I got to save more. I got to plan for longer. Maybe I should go out and buy an annuity. 'cause an annuity will pay me for the rest of my life and, um, maybe it'll be a good deal. Whereas if that test result came back and said, no, Mosh, you, you're, you're not looking at a long time, I wouldn't buy that.
Longevity heterogeneity is the separation of longevity from this wide, vague pool to, yeah, I know a little bit more about it than someone else does. And I think that information helps us make better financial decisions.
Cameron: Now what's interesting, I think, um, that you pointed out in your book is that this longevity heterogeneity is not random. It's actually associated with things like wealth. So you end up with this, if I can use the word class conflict between those who are more likely to benefit from a longer draw on the pension system because they're going to live longer, and those who are more likely to die shortly after they retire.
And that difference is related to income and wealth.
Moshe: It is in fact when you look back at things that have shocked you when you read them, that you remember, you know, we read hundreds of articles a year, some of them stick in your head. One of the ones that stuck in my head was a few years ago studying the Journal of the American Medical Association – done by economists, interestingly enough – that shows the relationship between income that you just pointed out, and life expectancy, was done in the us. If your income is in the lowest quintile or the lowest decile versus your income is in the highest deciles you're, you're talking about a life expectancy gap of 10 to 15 years.
You live 10 to 15 years longer. Is it the income that's buying you longevity? Is it the income that teaches you through education to take care of yourself better? Is there some other channel by which this is taking place? Income and longevity definitely are associated with each other, and if income is correlated with wealth, there you go.
The wealthy live longer. that study took place in the US which has a very, very skewed longevity distribution. I mean, you have states with life expectancies that really take you back to the 18th century. this was done in Canada by two economists, and they found something not as extreme, but similar again, wealth income associated with greater longevity. If you are a female that happens to be wealthy and living in BC your life expectancy is going to be a lot higher than you know, male. And let's pick Nova Scotia as just the other side of the country. So yes, longevity is associated with income and wealth.
And in the book I talk about a few other things that are less expected. Longevity tends to be associated with religious beliefs, which is a controversial finding. Not a lot of people want to hear that. That belief does that, and usually the channel there is part of a community. Part of a group of people, they take care of each other. They're more likely to you know, eat better, eat healthy, you know, act activities are less risky.
But that's an association. And in fact, there's a sub genre of research and demographics that tries to find Blue zones, areas of the world where people live longer, and is it diet? Is it because they garden? Is it stress, less stress? So the short answer is absolutely, absolutely. There is a huge heterogeneity in longevity.
Cameron: Well, this takes us back to the recommendation that you're making out of this book, which is that we need to rethink how we do these pension schemes. And if I get the gist of your suggestion, it's that we need to look for these kinds of naturally occurring areas where there is communal solidarity and perhaps orient our retirement saving schemes around, what's the right word to use, "leveraging" that solidarity?
Moshe: Yeah. Um, you know, when you look at why it's developed the way it is, to quote Adam Smith, you know, the larger you are, you have economies of scale. And if we have trillion dollar funds, it's better for the participants than if we have billion dollar funds and billion dollar funds are better than million dollar funds. And, you know, because we're going to squeeze the fees down.
There's a lot of evidence that you don't really squeeze the fees down proportionally or absolutely. But more importantly, these massively large insurance schemes where I'm subsidizing someone on the other side of the world just doesn't grab my moral sense, you know, Adam Smith's moral sentiment. I just don't feel a solidarity if my money is going to subsidize a, you know, an earthquake in Taiwan. I'm sorry, I just don't feel it.
Oh, so this is staying within Canada. Okay. So if something happens in BC, okay, I feel a little bit more there. I'm helping my fellow Canadian. And I think that's one of the issues that we're going to have to contend with as people learn what they're really getting from all these funds that they're participating in. The analytics are out there.
Cameron: I understand what you're saying, but it's not just about learning about the analytics, it's also about the breakdown of that solidarity in society. We become more and more tribal as a society and that can fracture that sense of belonging to something.
It used to be very clear to most people in Canada, what it meant to be Canadian, even if we were completely wrong about that.
We had this shared understanding of, you know, this Canada was this place with, you know, peacekeepers and Mounties and stuff like that. And we found out that some of our national symbols weren't all that they held themselves out to be.
Moshe: Yeah.
Cameron: And, as a result, or at least continuous with that, um, you've got this breakdown of the sense of community, and you end up with provinces wanting to go their own way.
So, there's a lot of differences and a lot of fragility in our systems for looking after each other.
Moshe: Yeah, and I think just to that point, you've just discussed something that's of a first order importance. You know, pensions are of a third order importance. I mean, when you think about, what are the things that keep, people up at night, it, it is some of the things that you've discussed and not whether the IRR on my CPP is high enough to justify participating in it, but it's certainly part of the bigger picture. It's a good example of solidarity. You know, hey, you're part of this scheme, and this fund and this pool, and there's some benefits to it.
Cameron: Well, if we start dreaming in terms of pension acronyms, I think we know the battle's been lost.
Moshe: Yeah.
Cameron: Thank you, Moshe, for talking to me about this book.
I really appreciate it.
Moshe: My pleasure.
Links
Moshe Milevsky’s research and teaching website
Research
The Religous Roots of Longevity Risk Sharing
Credits
Host and producer: Cameron Graham
Co-producer: Andrew Micak
Photos: York University
Music: Musicbed
Tools: Descript, Squadcast
Recorded: May 14, 2025
Location: Toronto
