Longevity Risk, Retirement Savings and Financial Innovation

62 Pages Posted: 13 May 2011

See all articles by Joao F. Cocco

Joao F. Cocco

London Business School; Centre for Economic Policy Research (CEPR)

Francisco Gomes

London Business School

Multiple version iconThere are 2 versions of this paper

Date Written: March 2011

Abstract

Over the last couple of decades there have been unprecedented, and to some extent unexpected, increases in life expectancy which have raised important concerns for retirement savings and for the affordability of defined-benefit pension plans. We address questions concerning these topics by introducing longevity risk in the standard life-cycle model of consumption and savings decisions. We allow individuals to hedge this risk through endogenous saving and retirement decisions and, investigate the extent to which they would benefit from investing in financial assets designed to hedge shocks to survival probabilities. We find that, when longevity risk is calibrated to match forward-looking projections the benefits of such investment are substantial. This lends support to the idea that such hedging should be pursued by defined-benefit pension plans on behalf of their beneficiaries. Finally, we draw implications for optimal security design.

Suggested Citation

Cocco, João F. and Gomes, Francisco, Longevity Risk, Retirement Savings and Financial Innovation (March 2011). Available at SSRN: https://ssrn.com/abstract=1836512 or http://dx.doi.org/10.2139/ssrn.1836512

João F. Cocco

London Business School ( email )

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Centre for Economic Policy Research (CEPR)

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Francisco Gomes (Contact Author)

London Business School ( email )

Finance Department
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London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/view/francisco-gomes/home

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