Actuarial Neutrality when Longevity Increases: An Application to the Italian Pension System

Michele Belloni and Carlo Maccheroni
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Carlo Maccheroni: University of Turin and University "L.Bocconi", Milan

No 47, CeRP Working Papers from Center for Research on Pensions and Welfare Policies, Turin (Italy)

Abstract: As a possible solution to the severe crises of the PAYGO pension systems induced by population aging and by low economic growth, many countries are recently switching from a defined benefit (DB) to a notional defined contribution (NDC) scheme. Particularly important for the NDC systems are the rules which establish how to incorporate life expectancies and their changes into the pension formulae. This work investigates these issues focusing on the Italian NDC system, introduced by the 1995 reform and gradually taking the place of the previous DB one. The methodology used follows a representative agents approach, in which each agent describes a cohort, either involved in the transition to the new rules or of steady-state. Cohort-and-gender mortality projections, developed ad hoc for this work, are exploited to establish a benchmark against which actuarial fairness and neutrality can be assessed. The NDC Italian pension system is almost actuarially fair and neutral. However, some noticeable distortions from our benchmark exist. A remarkable one comes from the use in the pension formulae of mortality tables which do not incorporate longitudinal trends in mortality rates.

Keywords: social security; notional defined contribution; actuarial neutrality; actuarial fairness; money's worth measures; demographic trends; cohort-specific mortality projections (search for similar items in EconPapers)
JEL-codes: C23 D31 H55 J11 J14 J16 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2006-03
New Economics Papers: this item is included in nep-pbe
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