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Measuring the Impact of Longevity Risk on Pension Systems: The Case of Italy

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  • Emilio Bisetti
  • Carlo A. Favero

Abstract

This paper estimates the impact of longevity risk on pension systems by combining the prediction based on a Lee-Carter (1992) mortality model with the projected pension payments for different cohorts of retirees. We measure longevity risk by the difference between the upper bound of the total old-age pension expense and its mean estimate. This difference is as high as 4 per cent of annual GDP over the period 2040-2050. The impact of longevity risk is sizeably reduced by the introduction of indexation of retirement age to expected life at retirement. Our evidence speaks in favour of a market for longevity risk and calls for a closer scrutiny of the potential redistributive effects of longevity risk. Keywords: stochastic mortality, longevity risk, social security reform JEL Classification Numbers J11,J14

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 439.

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Date of creation: 2012
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Handle: RePEc:igi:igierp:439

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  1. Nicola Sartor & Laurence J. Kotlikoff & Willi Leibfritz, 1999. "Generational Accounts for Italy," NBER Chapters, in: Generational Accounting around the World, pages 299-324 National Bureau of Economic Research, Inc.
  2. Andrew J. G. Cairns & David Blake & Kevin Dowd, 2006. "A Two-Factor Model for Stochastic Mortality with Parameter Uncertainty: Theory and Calibration," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(4), pages 687-718.
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