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Getting Life Expectancy Estimates Right for Pension Policy: Period versus Cohort Approach

Author

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  • Ayuso, Mercedes

    (University of Barcelona)

  • Bravo, Jorge Miguel

    (Universidade Nova de Lisboa)

  • Holzmann, Robert

    (University of New South Wales)

Abstract

In many policy areas it is essential to use the best estimates of life expectancy, but such estimates are vital to most areas of pension policy – from indexed access age and the calculation of initial benefits to the financial sustainability of pension schemes and the operation of their balancing mechanism. This paper presents the conceptual differences between static period and dynamic cohort mortality tables, estimates the differences in life expectancy between both tables using data from Portugal and Spain, and compares official estimates of both life expectancy estimates for Australia, the United Kingdom, and the United States for 1981, 2010 and 2060. This comparison reveals major differences between period and cohort life expectancy in and between countries and across years. Using measures of period instead of cohort life expectancy creates an implicit subsidy for individuals of 30 percent or more, with potentially stark consequences on the financial sustainability of pension schemes. These and other implications for pension policy are explored and next steps suggested.

Suggested Citation

  • Ayuso, Mercedes & Bravo, Jorge Miguel & Holzmann, Robert, 2018. "Getting Life Expectancy Estimates Right for Pension Policy: Period versus Cohort Approach," IZA Discussion Papers 11512, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp11512
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    Cited by:

    1. 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.
    2. Holzmann, Robert & Alonso-García, Jennifer & Labit-Hardy, Heloise & Villegas, Andres M., 2017. "NDC Schemes and Heterogeneity in Longevity: Proposals for Redesign," IZA Discussion Papers 11193, Institute of Labor Economics (IZA).
    3. Bernd Genser & Robert Holzmann, 2019. "National Pension Policy and Globalization: A New Approach to Strive for Efficient Portability and Equitable Taxation," Working Paper Series of the Department of Economics, University of Konstanz 2019-04, Department of Economics, University of Konstanz.
    4. Filipe Costa Souza & Wilton Bernardino & Silvio C. Patricio, 2024. "How life-table right-censoring affected the Brazilian social security factor: an application of the gamma-Gompertz-Makeham model," Journal of Population Research, Springer, vol. 41(3), pages 1-38, September.
    5. Jesús-Adrián Álvarez & Malene Kallestrup-Lamb & Søren Kjærgaard, 2020. "Linking retirement age to life expectancy does not lessen the demographic implications of unequal lifespans," CREATES Research Papers 2020-17, Department of Economics and Business Economics, Aarhus University.
    6. Bravo, Jorge M. & Ayuso, Mercedes & Holzmann, Robert & Palmer, Edward, 2023. "Intergenerational actuarial fairness when longevity increases: Amending the retirement age," Insurance: Mathematics and Economics, Elsevier, vol. 113(C), pages 161-184.
    7. Fabrizio Culotta, 2021. "Life Expectancy Heterogeneity and Pension Fairness: An Italian North-South Divide," Risks, MDPI, vol. 9(3), pages 1-22, March.
    8. Keivan Diakite & Pierre Devolder, 2021. "Progressive Pension Formula and Life Expectancy Heterogeneity," Risks, MDPI, vol. 9(7), pages 1-19, July.
    9. József Banyár, 2021. "The Outlines of a Possible Pension System Funded with Human Capital," Risks, MDPI, vol. 9(4), pages 1-32, April.
    10. 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.
    11. Cláudia Simões & Luís Oliveira & Jorge M. Bravo, 2021. "Immunization Strategies for Funding Multiple Inflation-Linked Retirement Income Benefits," Risks, MDPI, vol. 9(4), pages 1-28, March.
    12. Samuel Asante Gyamerah & Janet Arthur & Saviour Worlanyo Akuamoah & Yethu Sithole, 2023. "Measurement and Impact of Longevity Risk in Portfolios of Pension Annuity: The Case in Sub Saharan Africa," FinTech, MDPI, vol. 2(1), pages 1-20, January.
    13. Bravo, Jorge Miguel & Ayuso, Mercedes & Holzmann, Robert, 2019. "Making Use of Home Equity: The Potential of Housing Wealth to Enhance Retirement Security," IZA Discussion Papers 12656, Institute of Labor Economics (IZA).
    14. Strozza, Cosmo & Vigezzi, Serena & Callaway, Julia & Kashnitsky, Ilya & Aleksandrovs, Aleksandrs & Vaupel, James W, 2022. "Socioeconomic inequalities in survival to retirement age or shortly afterwards: a register-based analysis," OSF Preprints 8wbdv, Center for Open Science.

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    More about this item

    Keywords

    life expectancy indexation; Lee-Carter; cross-country comparison; balancing mechanism;
    All these keywords.

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination

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