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Longevity Adjustment of Pension Benefits

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  • Lassila, Jukka
  • Valkonen, Tarmo

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.

Suggested Citation

  • Lassila, Jukka & Valkonen, Tarmo, 2007. "Longevity Adjustment of Pension Benefits," Discussion Papers 1073, The Research Institute of the Finnish Economy.
    • Handle: RePEc:rif:dpaper:1073
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    References listed on IDEAS

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    1. Alho, Juha M. & Hougaard Jensen, Svend E. & Lassila, Jukka & Valkonen, Tarmo, 2005. "Controlling the effects of demographic risks: the role of pension indexation schemes," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(2), pages 139-153, July.
    2. Fehr, Hans & Habermann, Christian, 2006. "Pension reform and demographic uncertainty: the case of Germany," Journal of Pension Economics and Finance, Cambridge University Press, vol. 5(1), pages 69-90, March.
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    5. Alan J. Auerbach & Kevin A. Hassett, 1999. "Uncertainty and the Design of Long-Run Fiscal Policy," NBER Working Papers 7036, National Bureau of Economic Research, Inc.
    6. Auerbach, Alan J. & Hassett, Kevin, 2007. "Optimal long-run fiscal policy: Constraints, preferences and the resolution of uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1451-1472, May.
    7. Torben Andersen, 2005. "Social Security and Longevity," CESifo Working Paper Series 1577, CESifo.
    8. Harris, Amy Rehder & Simpson, Michael, 2005. "Winners and Losers Under Various Approaches to Slowing Social Security Benefit Growth," National Tax Journal, National Tax Association;National Tax Journal, vol. 58(3), pages 523-543, September.
    9. Alan J. Auerbach & Kevin A. Hassett, 2002. "Fiscal Policy and Uncertainty," International Finance, Wiley Blackwell, vol. 5(2), pages 229-249.
    10. Auerbach,Alan J. & Lee,Ronald D. (ed.), 2001. "Demographic Change and Fiscal Policy," Cambridge Books, Cambridge University Press, number 9780521662444, October.
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    Cited by:

    1. José Enrique Devesa Carpio & Mar Devesa Carpio & Robert Meney Gaya & Amparo Nagore García & Inmaculada Domínguez Fabián & Borja Encinas Goenechea, 2012. "Equidad y sostenibilidad como objetivos ante la reforma del sistema contributivo de pensiones de jubilación," Hacienda Pública Española / Review of Public Economics, IEF, vol. 201(2), pages 9-38, June.
    2. Verbic, Miroslav, 2007. "Modelling the pension system in an overlapping-generations general equilibrium modelling framework," MPRA Paper 10350, University Library of Munich, Germany.
    3. Määttänen, Niku & Alho, Juha, 2014. "Response to updated mortality forecasts in life cycle saving and labor supply," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1120-1127.

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    More about this item

    Keywords

    pensions; longevity; demographic uncertainty;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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