Intergenerational Actuarial Fairness When Longevity Increases: Amending the Retirement Age

44 Pages Posted: 12 Nov 2021

See all articles by Jorge Miguel Bravo

Jorge Miguel Bravo

NOVA IMS

Mercedes Ayuso

University of Barcelona

Robert Holzmann

Austrian National Bank

Edward Palmer

Uppsala Center for Labor Studies and Department of Economics

Date Written: 2021

Abstract

Continuous longevity improvements and population ageing have led countries to modify national public pension schemes by increasing the standard and early retirement ages in a discretionary, scheduled, or automatic way, and by making it harder for people to retire prematurely. To this end, countries have adopted alternative retirement age strategies, but our analyses show that the measures taken are often poorly designed and consequently misaligned with the pension scheme’s ultimate goals. In addition, our analyses demonstrate that countries risk falling short of their goals given their use of projection methods that underestimate life expectancy. This paper discusses how to implement automatic indexation of the retirement age to life expectancy developments while respecting the principles of intergenerational actuarial fairness and neutrality among generations. We show that in policy designs in which extended working lives translate into additional pension entitlements, the pension age must be automatically updated to keep the period in retirement constant. Alternatively, policy designs that pursue a fixed replacement rate are consistent with retirement age policies targeting a constant balance between active years in the workforce and years in retirement. The empirical strategy employed to project the relevant cohort life expectancy uses a Bayesian Model Ensemble approach to stochastic mortality modelling to generate forecasts of intergenerationally and actuarially fair pension ages for 23 countries and regions from 2000 to 2050. The empirical results show that the pension age increases needed to accommodate the effect of longevity developments on pay-as-you-go equilibrium and to reinstate equity between generations are sizeable and well beyond those employed and/or legislated in most countries. A new wave of pension reforms may be at the doorsteps.

Keywords: retirement age, actuarial fairness, intergenerational neutrality, pensions, Bayesian Model Ensemble, population ageing

JEL Classification: H550, G220, C630, C530, H230

Suggested Citation

Bravo, Jorge Miguel and Ayuso, Mercedes and Holzmann, Robert and Palmer, Edward, Intergenerational Actuarial Fairness When Longevity Increases: Amending the Retirement Age (2021). CESifo Working Paper No. 9408, Available at SSRN: https://ssrn.com/abstract=3961911 or http://dx.doi.org/10.2139/ssrn.3961911

Jorge Miguel Bravo (Contact Author)

NOVA IMS ( email )

Campolide Campus
Lisboa, 1099-085
Portugal

Mercedes Ayuso

University of Barcelona ( email )

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

Robert Holzmann

Austrian National Bank ( email )

Wien 9, Otto Wagner Platz
Postfach 61
1010 Vienna, 1090
Austria

Edward Palmer

Uppsala Center for Labor Studies and Department of Economics ( email )

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