An Economic Analysis of Proposals to Improve Coverage of Longevity Risk

Industrial Alliance Research Chair on the Economics of Aging Working Paper 14-06

36 Pages Posted: 14 Jan 2015

See all articles by David Boisclair

David Boisclair

University of Quebec at Montreal (UQAM)

Jean-Yves Duclos

Laval University; IZA Institute of Labor Economics

Steeve Marchand

University of Melbourne - Melbourne Institute: Applied Economic & Social Research

Pierre-Carl Michaud

University of Quebec at Montreal (UQAM) - Department of Economics; Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPÉE); RAND Corporation, Labor and Population; IZA Institute of Labor Economics; Netspar

Date Written: December 13, 2014

Abstract

We use simulation methods to analyze the impacts of certain proposed reforms to improve the coverage of longevity risk. This risk, which may in principle be adequately covered by classic defined-benefit pension plans, has been of particular interest in Quebec for some years now, notably due to the decline in the participation to such plans. Recent proposals which aim to increase the coverage of longevity risk mostly deal with expansion of the "2nd pillar" of the retirement income system, currently comprised of the Quebec Pension Plan. We therefore consider a key proposal of the D’Amours committee (the longevity pension), in addition to two other proposals: that of Mintz and Wilson, which aims to increase the generosity of the current regime, and that of Wolfson, which introduces a concept of contribution and benefit rates differentiated by income. Using data from Statistics Canada surveys, we analyze the internal rate of return (IRR) of these proposals for various types of individuals taking into consideration inequality in life expectancy, temporal variability of income, and interactions with taxation and the different retirement income support programs. We contrast the results with those obtained when opting instead for additional contributions into existing voluntary savings vehicles combined with a basic annuity purchased at retirement.

Keywords: Longevity risk, retirement savings, inequality, life expectancy

JEL Classification: I14, J18, J26, J32

Suggested Citation

Boisclair, David and Duclos, Jean-Yves and Marchand, Steeve and Michaud, Pierre-Carl, An Economic Analysis of Proposals to Improve Coverage of Longevity Risk (December 13, 2014). Industrial Alliance Research Chair on the Economics of Aging Working Paper 14-06, Available at SSRN: https://ssrn.com/abstract=2549194 or http://dx.doi.org/10.2139/ssrn.2549194

David Boisclair

University of Quebec at Montreal (UQAM) ( email )

PB 8888 Station DownTown
Succursale Centre Ville
Montreal, Quebec H3C3P8
Canada

Jean-Yves Duclos (Contact Author)

Laval University ( email )

Quebec G1K 7P4
Canada
418-656-7096 (Phone)
418-656-9727 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Steeve Marchand

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

Pierre-Carl Michaud

University of Quebec at Montreal (UQAM) - Department of Economics ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada

Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPÉE) ( email )

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

RAND Corporation, Labor and Population ( email )

Santa Monica, CA 90407-2138
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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