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Actuarial Neutrality when Longevity Increases: An Application to the Italian Pension System

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Author Info
Michele Belloni () (Center for Research on Pensions and Welfare Policies)
Carlo Maccheroni (University of Turin and University "L.Bocconi", Milan)

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Abstract

As a possible solution to the severe crises of the PAYGO pension systems induced by population aging and by low economic growth, many countries are recently switching from a defined benefit (DB) to a notional defined contribution (NDC) scheme. Particularly important for the NDC systems are the rules which establish how to incorporate life expectancies and their changes into the pension formulae. This work investigates these issues focusing on the Italian NDC system, introduced by the 1995 reform and gradually taking the place of the previous DB one. The methodology used follows a representative agents approach, in which each agent describes a cohort, either involved in the transition to the new rules or of steady-state. Cohort-and-gender mortality projections, developed ad hoc for this work, are exploited to establish a benchmark against which actuarial fairness and neutrality can be assessed. The NDC Italian pension system is almost actuarially fair and neutral. However, some noticeable distortions from our benchmark exist. A remarkable one comes from the use in the pension formulae of mortality tables which do not incorporate longitudinal trends in mortality rates.

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Publisher Info
Paper provided by Center for Research on Pensions and Welfare Policies, Turin (Italy) in its series CeRP Working Papers with number 47.

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Length: 52 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:crp:wpaper:47

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Related research
Keywords: social security; notional defined contribution; actuarial neutrality; actuarial fairness; money's worth measures; demographic trends; cohort-specific mortality projections;

Find related papers by JEL classification:
J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends and Forecasts
J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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