Uncertain Demographics and Pension Policy

In trying to assess the fiscal situation of public pension systems, demographic developments must be projected several decades into the future. The accuracy of such projections and the consequences of their errors to pension conclusions can be considered using stochastic population simulations. Country studies using stochastic population projections show that demographic uncertainty alone makes long-term pension projections very uncertain. The perception these studies provide of the magnitudes of uncertainty is substantially larger than that obtained from assessments relying on high-low scenarios or other similar variants. This does not mean that inactivity of policies is recommended; on the contrary, the asymmetrically large welfare losses in cases worse than expected form an extra reason for active policies. In pension policy analysis stochastic population projections can be used as presentations of demographic risks. Explicit risk analysis is especially useful for policies that link pension outcomes to demographic developments, such as adjusting pension benefits for changes in longevity or switching to a non-financial defined-contribution pension system.