Longevity Adjustment of Pension Benefits

Jukka Lassila and Tarmo Valkonen

No 1073, Discussion Papers from The Research Institute of the Finnish Economy

Abstract: In anticipation of future gains in life expectancy, several countries have passed laws that automatically adjust pensions, if life expectancy changes. In this paper we study the effects of longevity adjustment under demographic uncertainty in Finland. If longevity increases, the adjustment decreases the contribution rate, and the reduction is bigger the higher the rate would have been without the reform. On the other hand, longevity adjustment increases the uncertainty in replacement rates. The current middle-aged generations, whose pensions are reduced more than contributions, are likely to experience the largest losses. The full gains are observed far in future. The quantitative results depend on, besides demographic realisations, the specifics of the pension system. Longevity adjustment significantly weakens the defined-benefit nature of the Finnish pension system and brings in a strong defined-contribution flavour.

Keywords: pensions; longevity; demographic uncertainty (search for similar items in EconPapers)
JEL-codes: H55 J11 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2007
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (3)

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