Sharing Longevity Risk: Why Governments Should Issue Longevity Bonds

Abstract:     
Government-issued longevity bonds would allow longevity risk to be shared efficiently and fairly between generations. In exchange for paying a longevity risk premium, the current generation of retirees can look to future generations to hedge their aggregate longevity risk. There are also wider social benefits. Longevity bonds will lead to a more secure pension savings market - both defined contribution and defined benefit - together with a more efficient annuity market resulting in less means-tested benefits and a higher tax take. The emerging capital market in longevity-linked instruments can get help to kick start market participation through the establishment of reliable longevity indices and key price points on the longevity risk term structure and can build on this term structure with liquid longevity derivatives.

An earlier version was presented at ‘Risk Sharing in Defined Contribution Pension Schemes’, Department for Work and Pensions and Netspar Conference, University of Exeter, 7-8 January 2010

Number of Pages in PDF File: 27

Keywords: Longevity risk, longevity bonds, public policy, political economy

JEL Classification: G22, G23, G24, G28, H11, H63, J11, J18

working papers series