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Longevity risk, retirement savings, and financial innovation

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  • Cocco, João F.
  • Gomes, Francisco J.

Abstract

Over the last couple of decades unprecedented increases in life expectancy have raised important concerns for retirement savings. We solve a life-cycle model with longevity risk, which can be hedged through endogenous saving and retirement decisions. We investigate the benefits of financial assets designed to hedge the shocks to survival probabilities. When longevity risk is calibrated to match forward-looking projections, those benefits are substantial. This lends support to the idea that such hedging should be pursued by defined benefit pension plans on behalf of their beneficiaries. Finally, we draw implications for optimal security design.

Suggested Citation

  • Cocco, João F. & Gomes, Francisco J., 2012. "Longevity risk, retirement savings, and financial innovation," Journal of Financial Economics, Elsevier, vol. 103(3), pages 507-529.
    • Handle: RePEc:eee:jfinec:v:103:y:2012:i:3:p:507-529
    DOI: 10.1016/j.jfineco.2011.10.002
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    More about this item

    Keywords

    Life cycle savings; Mortality risk; Pension plans;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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