Abstract
An increasing number of empirical studies have shown a positive relationship between lifetime income and life expectancy at retirement. One’s income during the active part of one’s career translates into the amount of retirement benefits one might receive, leading to actuarial unfairness inside cohorts of retirees. In order to discuss unfairness and sustainability issues, the Belgium pension reform committee issued a proposal for a point system designed to be both sustainable and adequate. In this paper, we use a similar defined benefit framework in order to set out a compensation mechanism linked to life expectancy heterogeneity during the active part of the career, aiming to reduce unfairness once reaching retirement. This method is based on the progressivity of pension benefit formulae. We implement these ideas in a simple demographic context in order to capture the constraints related to the model.
Highlights
Many studies have observed different tendencies in the relationship between mortality and income
This trend was observed in Denmark in a 2008 study by (Brønnum-Hansen and Baadsgaard 2008), where their results showed that the gap in health expectancy between persons with low and high educational levels was increasing with startling constancy
We introduce a progressive transformation of the pension formula that takes into account the life expectancy differential in order to satisfy two conditions: the sustainability condition of a PAYG scheme, and the actuarial fairness ratio equality condition for agents of different salary classes
Summary
Many studies have observed different tendencies in the relationship between mortality and income. This research provided an up-to-date picture of differences in lifespan among Italian regions, but it calculated the implications of such disparities in terms of an implicit transfer of pension resources His conclusion was that the conventional architecture of Italian public pension systems has to be changed to differentiate structural characteristics, such as the longevity factor used to calculate pension annuities. In order to make completely transparent redistributive performances of public pension systems, a closer and updated monitoring of lifespan heterogeneity along important socioeconomic characteristics is required Another approach would be taking into account the life expectancy differences directly in the pension formula, as (Breyer and Hupfeld 2008) did.
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