Linking Pensions to Life Expectancy: Tackling Conceptual Uncertainty through Bayesian Model Averaging
Year: 2021
Type: article
Abstract: Linking pensions to longevity developments at retirement age has been one of the most common policy responses of pension schemes to aging populations. The introduction of automatic stabilizers is primarily motivated by cost containment objectives, but there are other dimensions of welfare restructuring in the politics of pension reforms, including recalibration, rationalization, and blame avoidance for unpopular policies that involve retrenchments. This paper examines the policy designs and implications of linking entry pensions to life expectancy developments through sustainability factors or life expectancy coefficients in Finland, Portugal, and Spain. To address conceptual and specification uncertainty in policymaking, we propose and apply a Bayesian model averaging approach to stochastic mortality modeling and life expectancy computation. The results show that: (i) sustainability factors will generate substantial pension entitlement reductions in the three countries analyzed; (ii) the magnitude of the pension losses depends on the factor design; (iii) to offset pension cuts and safeguard pension adequacy, individuals will have to prolong their working lives significantly; (iv) factor designs considering cohort longevity markers would have generated higher pension cuts in countries with increasing life expectancy gap.
Source: Mathematics
DOI: 10.3390/math9243307
Authors: Jorge M. Bravo, Mercedes Ayuso
Language: English
Subfield: Demography
Field: Social Sciences
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $1,728
OpenAlex ID: W4200403779