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Linking Pensions to Life Expectancy: Tackling Conceptual Uncertainty through Bayesian Model Averaging

Author

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  • Jorge M. Bravo

    (NOVA IMS Universidade Nova de Lisboa, MagIC, Université Paris-Dauphine PSL, CEFAGE-UE, 1070 Lisbon, Portugal
    Current address: Universidade Nova de Lisboa (NOVA IMS), Campus de Campolide, 1070 Lisboa, Portugal.
    These authors contributed equally to this work.)

  • Mercedes Ayuso

    (Department of Econometrics, Statistics and Applied Economy, Riskcenter-UB, University of Barcelona, 08034 Barcelona, Spain
    These authors contributed equally to this work.)

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.

Suggested Citation

  • Jorge M. Bravo & Mercedes Ayuso, 2021. "Linking Pensions to Life Expectancy: Tackling Conceptual Uncertainty through Bayesian Model Averaging," Mathematics, MDPI, vol. 9(24), pages 1-27, December.
    • Handle: RePEc:gam:jmathe:v:9:y:2021:i:24:p:3307-:d:705939
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    References listed on IDEAS

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    1. Nicholas Barr & Peter Diamond, 2009. "Reforming pensions: Principles, analytical errors and policy directions," International Social Security Review, John Wiley & Sons, vol. 62(2), pages 5-29, April.
    2. Mercedes Ayuso & Jorge M. Bravo & Robert Holzmann & Edward Palmer, 2021. "Automatic Indexation of the Pension Age to Life Expectancy: When Policy Design Matters," Risks, MDPI, vol. 9(5), pages 1-28, May.
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    1. Bravo, Jorge M. & Ayuso, Mercedes & Holzmann, Robert & Palmer, Edward, 2023. "Intergenerational actuarial fairness when longevity increases: Amending the retirement age," Insurance: Mathematics and Economics, Elsevier, vol. 113(C), pages 161-184.

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