Longevity Risk, Retirement Savings, and Financial Innovation

76 Pages Posted: 18 Jul 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 1, 2011

Abstract

Over the last couple of decades there have been unprecedented increases in life expectancy which have raised important concerns for retirement savings. We solve a life-cyclemodel with longevity risk, which can be hedged through endogenous saving and retirement decisions. We investigate the benefits of financial assets designed to hedge the shocks to survival probabilities. When longevity risk is calibrated to match forward-looking projections those benefits 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 1, 2011). Netspar Discussion Paper No. 03/2011-061, Available at SSRN: https://ssrn.com/abstract=1888305 or http://dx.doi.org/10.2139/ssrn.1888305

João F. Cocco (Contact Author)

London Business School ( email )

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Centre for Economic Policy Research (CEPR)

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Francisco Gomes

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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