Abstract
Increasing retirement ages in an automatic or scheduled way with increasing life expectancy at retirement is a popular pension policy response to continuous longevity improvements. The question addressed here is: to what extent is simply adopting this approach likely to fulfill the overall goals of policy? To shed some light on the answer, we examine the policies of four countries that have recently introduced automatic indexation of pension ages to life expectancy–The Netherlands, Denmark, Portugal and Slovakia. To this end, we forecast an alternative period and cohort life expectancy measures using a Bayesian Model Ensemble of heterogeneous stochastic mortality models comprised of parametric models, principal component methods, and smoothing approaches. The approach involves both the selection of the model confidence set and the determination of optimal weights. Model-averaged Bayesian credible prediction intervals are derived accounting for various stochastic process, model, and parameter risks. The results show that: (i) retirement ages are forecasted to increase substantially in the coming decades, particularly if a constant period in retirement is targeted; (ii) retirement age policy outcomes may substantially deviate from the policy goal(s) depending on the design adopted and its implementation; and (iii) the choice of a cohort over period life expectancy measure matters. In addition, the distributional issues arising with the increasing socio-economic gap in life expectancy remain largely unaddressed.
Highlights
Our results show that: (i) standard retirement ages in countries where they are indexed to projected longevity are forecasted to increase substantially in the decades, in the countries that have opted to target a constant period in retirement; (ii) the retirement age policy outcomes may substantially deviate from the initial goals due to poor policy design; and, above all, (iii) the use of a proper life expectancy measure in pension design and reform matters
The Slovak Republic pension system consists of minimum pensions, an earning related universal pension system (PAYG, mandatory, defined benefit (DB) points system with benefits that depend on individual earnings relative to the average) covering almost all pensioners in Slovakia, the armed forces pension scheme and voluntary fully funded 2nd and 3rd pillar DC schemes
The analysis of Bayesian Model Ensemble (BME) weights shows that no single stochastic mortality model dominates, with individual contributions to the forecast combination ranging between a minimum of roughly 11% and a maximum of 20%
Summary
Recent empirical evidence shows that, in most countries, there is a sizable and systematic difference between cohort and period life expectancy measures (life expectancy gap) at retirement ages, generating sizable ex-ante tax/subsidies from future to current generations and, an unfair actuarial link between the contribution effort and pension entitlements The latter, in turn, distorts labour supply decisions leading to macroeconomic inefficiency, and incorrectly signals solvency prospects and, as a result, delays pension reforms (Ayuso et al 2021; Bravo et al 2021a). Our results show that: (i) standard retirement ages in countries where they are indexed to projected longevity are forecasted to increase substantially in the decades, in the countries that have opted to target a constant period in retirement; (ii) the retirement age policy outcomes may substantially deviate from the initial goals due to poor policy design; and, above all, (iii) the use of a proper (cohort) life expectancy measure in pension design and reform matters.
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