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Linking retirement age to life expectancy does not lessen the demographic implications of unequal lifespans

Jesús-Adrián Álvarez (), Malene Kallestrup-Lamb () and Søren Kjærgaard ()
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Jesús-Adrián Álvarez: University of Southern Denmark, Postal: Interdisciplinary Centre on Population Dynamics, Campusvej 55, DK-5230 Odense M, Denmark
Malene Kallestrup-Lamb: Aarhus University and CREATES, Postal: Department of Economics and Business Economics, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Søren Kjærgaard: IST, EBB, Epidemiology, Biostatistics and Biodemography,, Postal: J.B. Winsloews Vej 9, 5000 Odense C, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: The fact that individuals are living longer and thus spending more time in retirement challenges the sustainability of pension systems. This has forced policy makers to rethink the design of pension plans to mitigate the burden of increased longevity. Countries such as the Netherlands, Estonia, Denmark and Finland have implemented reforms that link retirement age to changes in life expectancy. However, the demographic and financial implications of such linkages are not well understood. This study analyses the Danish case, using high-quality data from population registers during the period 1985-2016. We identify trends in demographic and actuarial measures after retirement by sex and socio-economic group. We also introduce a new decomposition method to disentangle the demographic sources of socio-economic disparities in pension costs per year of expected benefits. We reach two main results. First, linking retirement age to life expectancy increases uncertainty about length of life after retirement, with the financial cost becoming more sensitive to changes in mortality. Second, socio-economic disparities in lifespans persist regardless of the age at which individuals retire. Males from lower socio-economic groups are at a greater disadvantage, because they spend fewer years in retirement, pay higher pension costs per year of expected benefits and are exposed to higher longevity risk than the rest of the population. This disadvantageous setting is magnified when retirement age is linked to life expectancy.

Keywords: Danish pension system; longevity; socio-economic disparities; lifespan inequality; pensions; mortality heterogeneity (search for similar items in EconPapers)
JEL-codes: H55 J11 J26 (search for similar items in EconPapers)
Pages: 27
Date: 2020-12-16
New Economics Papers: this item is included in nep-age, nep-dem, nep-eur and nep-lma
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