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The economics of sharing macro-longevity risk

Dirk Broeders, Roel Mehlkopf and Annick Ool ()

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: Pension funds face macro-longevity risk or uncertainty about future mortality rates. We analyze macro-longevity risk sharing between cohorts in a pension fund as a risk management tool. We show that both the optimal risk-sharing rule and the welfare gains from risk sharing depend on the retirement age policy. Welfare gains from sharing macro-longevity risk measured on a 10-year horizon in case of a fixed retirement age are between 0.2 and 0.3 percent of certainty equivalent consumption after retirement. Cohorts experience a similar impact of macro-longevity risk on post retirement consumption and it is not optimal for young cohorts to absorb risk of older cohorts. However, in case the retirement age is fully linked to changes in life expectancy, the welfare gains are substantially higher. The risk bearing capacity of workers is larger when they use their labor supply as a hedge against macro-longevity risk. As a result, workers absorb risk from retirees in the optimal risk-sharing rule, thereby increasing the welfare gain up to 2.7 percent.

Keywords: Macro-longevity risk; risk sharing; welfare analysis; retirement age (search for similar items in EconPapers)
JEL-codes: D61 G22 J26 J32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age, nep-lma and nep-rmg
Date: 2018-12
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