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Actuarial Neutrality when Longevity Increases: An Application to the Italian Pension System

Author

Listed:
  • Michele Belloni

    (Center for Research on Pensions and Welfare Policies)

  • Carlo Maccheroni

    (University of Turin and University "L.Bocconi", Milan)

Abstract

As a possible solution to the severe crises of the PAYGO pension systems induced by population aging and by low economic growth, many countries are recently switching from a defined benefit (DB) to a notional defined contribution (NDC) scheme. Particularly important for the NDC systems are the rules which establish how to incorporate life expectancies and their changes into the pension formulae. This work investigates these issues focusing on the Italian NDC system, introduced by the 1995 reform and gradually taking the place of the previous DB one. The methodology used follows a representative agents approach, in which each agent describes a cohort, either involved in the transition to the new rules or of steady-state. Cohort-and-gender mortality projections, developed ad hoc for this work, are exploited to establish a benchmark against which actuarial fairness and neutrality can be assessed. The NDC Italian pension system is almost actuarially fair and neutral. However, some noticeable distortions from our benchmark exist. A remarkable one comes from the use in the pension formulae of mortality tables which do not incorporate longitudinal trends in mortality rates.

Suggested Citation

  • Michele Belloni & Carlo Maccheroni, 2006. "Actuarial Neutrality when Longevity Increases: An Application to the Italian Pension System," CeRP Working Papers 47, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    • Handle: RePEc:crp:wpaper:47
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    Citations

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    Cited by:

    1. Frank W. Heiland & Na Yin, 2014. "Have We Finally Achieved Actuarial Fairness of Social Security Retirement Benefits and Will It Last?," Working Papers wp307, University of Michigan, Michigan Retirement Research Center.
    2. Roberto Leombruni & Michele Mosca, 2011. "The lifetime gender gap in Italy. Do the pension system countervails labour market outcomes?," LABORatorio R. Revelli Working Papers Series 113, LABORatorio R. Revelli, Centre for Employment Studies.
    3. Leombruni Roberto & Mosca Michele, 2013. "The lifetime gender gap in Italy. Does the pension system countervail labour market outcomes?," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201302, University of Turin.

    More about this item

    Keywords

    social security; notional defined contribution; actuarial neutrality; actuarial fairness; money's worth measures; demographic trends; cohort-specific mortality projections;
    All these keywords.

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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