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Automatic Indexation of the Pension Age to Life Expectancy: When Policy Design Matters

Author

Listed:
  • Mercedes Ayuso

    (Department of Econometrics, Statistics and Applied Economy, Riskcenter-UB, University of Barcelona, 08034 Barcelona, Spain
    These authors contributed equally to this work.)

  • Jorge M. Bravo

    (NOVA IMS Universidade Nova de Lisboa, MagIC, and Université Paris-Dauphine PSL, and CEFAGE-UE, 1070 Lisbon, Portugal
    These authors contributed equally to this work.)

  • Robert Holzmann

    (Austrian National Bank, and Austrian Academy of Sciences, and Australian Centre of Excellence in Population Ageing Research, CEPAR@UNSW, 1090 Vienna, Austria
    These authors contributed equally to this work.)

  • Edward Palmer

    (Uppsala Center for Labor Studies and Department of Economics, SE-751 20 Uppsala, Sweden
    These authors contributed equally to this work.)

Abstract

Increasing retirement ages in an automatic or scheduled way with increasing life expectancy at retirement is a popular pension policy response to continuous longevity improvements. The question addressed here is: to what extent is simply adopting this approach likely to fulfill the overall goals of policy? To shed some light on the answer, we examine the policies of four countries that have recently introduced automatic indexation of pension ages to life expectancy–The Netherlands, Denmark, Portugal and Slovakia. To this end, we forecast an alternative period and cohort life expectancy measures using a Bayesian Model Ensemble of heterogeneous stochastic mortality models comprised of parametric models, principal component methods, and smoothing approaches. The approach involves both the selection of the model confidence set and the determination of optimal weights. Model-averaged Bayesian credible prediction intervals are derived accounting for various stochastic process, model, and parameter risks. The results show that: (i) retirement ages are forecasted to increase substantially in the coming decades, particularly if a constant period in retirement is targeted; (ii) retirement age policy outcomes may substantially deviate from the policy goal(s) depending on the design adopted and its implementation; and (iii) the choice of a cohort over period life expectancy measure matters. In addition, the distributional issues arising with the increasing socio-economic gap in life expectancy remain largely unaddressed.

Suggested Citation

  • Mercedes Ayuso & Jorge M. Bravo & Robert Holzmann & Edward Palmer, 2021. "Automatic Indexation of the Pension Age to Life Expectancy: When Policy Design Matters," Risks, MDPI, vol. 9(5), pages 1-28, May.
  • Handle: RePEc:gam:jrisks:v:9:y:2021:i:5:p:96-:d:554249
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    References listed on IDEAS

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    4. Banyár, József, 2023. "A magyar nyugdíjrendszer pontrendszerre való áttérésének vizsgálata [Examining the transition to a points-based pension system]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 964-1000.
    5. Jorge M. Bravo & Mercedes Ayuso, 2021. "Linking Pensions to Life Expectancy: Tackling Conceptual Uncertainty through Bayesian Model Averaging," Mathematics, MDPI, vol. 9(24), pages 1-27, December.
    6. Bravo, Jorge M. & Ayuso, Mercedes & Holzmann, Robert & Palmer, Edward, 2021. "Addressing the life expectancy gap in pension policy," Insurance: Mathematics and Economics, Elsevier, vol. 99(C), pages 200-221.
    7. Golpe, Antonio A. & Sánchez-Fuentes, A. Jesus & Vides, José Carlos, 2023. "Fiscal sustainability, monetary policy and economic growth in the Euro Area: In search of the ultimate causal path," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 1026-1045.

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