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

31 Pages Posted: 14 May 2018

See all articles by Mercedes Ayuso

Mercedes Ayuso

University of Barcelona

Jorge Miguel Bravo

NOVA IMS

Robert Holzmann

University of Malaya; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); World Bank

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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.

Keywords: cross-country comparison, Lee-Carter, life expectancy indexation, balancing mechanism

JEL Classification: D9, G22, H55, J13, J14, J16

Suggested Citation

Ayuso, Mercedes and Bravo, Jorge Miguel and Holzmann, Robert, Getting Life Expectancy Estimates Right for Pension Policy: Period Versus Cohort Approach. IZA Discussion Paper No. 11512, Available at SSRN: https://ssrn.com/abstract=3177388

Mercedes Ayuso (Contact Author)

University of Barcelona ( email )

Av. Diagonal 690
Barcelona, E-08034
Spain
+34 934 021409 (Phone)
+34 934 021 821 (Fax)

Jorge Miguel Bravo

NOVA IMS ( email )

Campolide Campus
Lisboa, 1099-085
Portugal

Robert Holzmann

University of Malaya ( email )

University of Malaya
Kuala Lumpur, Wilayah Persekutuan 50603
Malaysia

IZA Institute of Labor Economics

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

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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