Longevity risk, retirement savings, and financial innovation

João F. Cocco and Francisco J. Gomes

Journal of Financial Economics, 2012, vol. 103, issue 3, 507-529

Abstract: Over the last couple of decades unprecedented increases in life expectancy have raised important concerns for retirement savings. We solve a life-cycle model 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.

Keywords: Life cycle savings; Mortality risk; Pension plans (search for similar items in EconPapers)
JEL-codes: D91 G11 G23 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (77)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:103:y:2012:i:3:p:507-529

DOI: 10.1016/j.jfineco.2011.10.002

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