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Longevity Adjustment of Pension Benefits

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  • Lassila, Jukka
  • Valkonen, Tarmo

Abstract

In anticipation of future gains in life expectancy, several countries have passed laws that automatically adjust pensions, if life expectancy changes. In this paper we study the effects of longevity adjustment under demographic uncertainty in Finland. If longevity increases, the adjustment decreases the contribution rate, and the reduction is bigger the higher the rate would have been without the reform. On the other hand, longevity adjustment increases the uncertainty in replacement rates. The current middle-aged generations, whose pensions are reduced more than contributions, are likely to experience the largest losses. The full gains are observed far in future. The quantitative results depend on, besides demographic realisations, the specifics of the pension system. Longevity adjustment significantly weakens the defined-benefit nature of the Finnish pension system and brings in a strong defined-contribution flavour.

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Bibliographic Info

Paper provided by The Research Institute of the Finnish Economy in its series Discussion Papers with number 1073.

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Length: 20 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:rif:dpaper:1073

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Keywords: pensions; longevity; demographic uncertainty;

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References

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  1. Assar Lindbeck & Mats Persson, 2003. "The Gains from Pension Reform," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 74-112, March.
  2. Habermann, Christian & Fehr, Hans, 2003. "Pension Reform and Demographic Uncertainty : The Case of Germany," W.E.P. - Würzburg Economic Papers 47, University of Würzburg, Chair for Monetary Policy and International Economics.
  3. Alho, Juha M. & Hougaard Jensen, Svend E. & Lassila, Jukka & Valkonen, Tarmo, 2005. "Controlling the effects of demographic risks: the role of pension indexation schemes," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(02), pages 139-153, July.
  4. Alan J. Auerbach & Kevin A. Hassett, 2002. "Optimal Long-Run Fiscal Policy: Constraints, Preferences and the Resolution of Uncertainty," NBER Working Papers 9132, National Bureau of Economic Research, Inc.
  5. Torben Andersen, 2005. "Social Security and Longevity," CESifo Working Paper Series 1577, CESifo Group Munich.
  6. Alan J. Auerbach & Kevin A. Hassett, 1999. "Uncertainty and the Design of Long-Run Fiscal Policy," NBER Working Papers 7036, National Bureau of Economic Research, Inc.
  7. Harris, Amy Rehder & Simpson, Michael, 2005. "Winners and Losers under Various Approaches to Slowing Social Security Benefit Growth," National Tax Journal, National Tax Association, vol. 58(3), pages 523-43, September.
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Cited by:
  1. José Enrique Devesa Carpio & Mar Devesa Carpio & Robert Meney Gaya & Amparo Nagore García & Inmaculada Domínguez Fabián & Borja Encinas Goenechea, 2012. "Equidad y sostenibilidad como objetivos ante la reforma del sistema contributivo de pensiones de jubilación," Hacienda Pública Española, IEF, vol. 201(2), pages 9-38, June.
  2. Lassila , Jukka & Valkonen, Tarmo, 2008. "Population ageing and fiscal sustainability in Finland: a stochastic analysis," Research Discussion Papers 28/2008, Bank of Finland.

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