Final answer:
Annuity payments beyond life expectancy are balanced within the annuity pool; funds plan for this by building surplus. Pensions and Social Security face challenges due to longer lifespans and smaller younger workforces, requiring more significant savings and adjustments to future payments.
Step-by-step explanation:
When a participant in a life annuity receives more than the expected number of payments due to outliving the estimated life expectancy, these additional payments are essentially accounted for by the law of large numbers that underlie annuity pools. Insurers and pension funds estimate life expectancy based on actuarial tables and collect premiums or contributions accordingly. These funds are invested, and the returns, along with the capital, are used to make the payments to annuitants. The additional payments to those who live longer are balanced by those who pass away earlier than expected. As individuals increasingly live longer, funds like Social Security's face challenges because they are drawn out at a higher rate over a longer period, while at the same time younger populations entering the workforce are smaller. Firms with pension funds similarly must account for these longer life expectancies, building up more significant savings in pension funds to fulfill their obligations.
As for the future value of payments received in the years to come, the calculation would use the formula Future value received years in the future = (1 + Interest rate)number of years t. For instance, a payment of $15 million in present, $20 million in one year, and $25 million in two years would each have a different future value depending on the interest rate and the time until receipt.