Author(s): Emilio Bisetti and Carlo A. Favero
This paper estimates the impact of longevity risk on pension systems by combining the prediction based on a Lee-Carter (1992) mortality model with the projected pension payments for different cohorts of retirees. We measure longevity risk by the difference between the upper bound of the total old-age pension expense and its mean estimate. This difference is as high as 4 per cent of annual GDP over the period 2040-2050. The impact of longevity risk is sizeably reduced by the introduction of indexation of retirement age to expected life at retirement. Our evidence speaks in favour of a market for longevity risk and calls for a closer scrutiny of the potential redistributive effects of longevity risk.
Keywords: stochastic mortality, longevity risk, social security reform
JEL codes: J11, J14