The Political Economy of Government-Issued Longevity Bonds

21 Pages Posted: 29 Nov 2006

See all articles by Jeffrey R. Brown

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); University of Illinois College of Law; University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA); University of Illinois at Urbana-Champaign - Department of Economics

Peter R. Orszag

Lazard Asset Management

Abstract

This article explores the trade-offs associated with government issuance of longevity bonds as a way of stimulating private annuity supply in the presence of aggregate mortality risk. We provide new calculations suggesting a 5 percent chance that aggregate mortality risk could ex post raise annuity costs for private insurers by as much as 5-10 percentage points, with the most likely effect based on historical patterns toward the lower end of that range. While we suspect that aggregate mortality risk does exert some upward pressure on annuity prices, evidence from private market pricing suggests that, to the extent that private insurers are accurately pricing this risk, the effect is less than 5 percentage points. We discuss ways that the private market can spread this risk, while emphasizing that the government has the unique ability to spread aggregate risk across generations. We note factors that might hamper such an efficient allocation of risk, including potential political incentives for the government to shift more than the optimal amount of risk onto future generations, and the possibility that government fiscal policy might allocate risk less efficiently within each generation than would private markets. We also discuss how large-scale longevity bond issuance might affect government borrowing costs, as well as political economy aspects of how the proceeds from such a bond issuance might be used.

Suggested Citation

Brown, Jeffrey R. and Orszag, Peter R., The Political Economy of Government-Issued Longevity Bonds. Journal of Risk & Insurance, Vol. 73, No. 4, pp. 611-631, December 2006. Available at SSRN: https://ssrn.com/abstract=947958 or http://dx.doi.org/10.1111/j.1539-6975.2006.00191.x

Jeffrey R. Brown (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA) ( email )

Urbana, IL 61801
United States

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

Peter R. Orszag

Lazard Asset Management ( email )

30 Rockefeller Plaza
New York, NY 10112
United States

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