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The Future of Old-Age Longevity: Competitive Pricing of Morality Contingent Claims

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  • Mullin, Charles
  • Philipson, Tomas J.

Abstract

The future course of old-age mortality is of great importance to public sector expenditures in countries where old-age programs account for large fractions of the public budget. This paper argues that the competitive market prices of mortality contingent claims, such as annuities and life insurance, contain information which allow one to infer the opinion of the market regarding the pace of the continued increase in old-age longevity. The paper develops methods to identify and estimate the mortality implicit in the market prices of such claims by identifying survival functions from prices of contracts that differ in their duration. Utilizing these methods, we provide estimates using cohort-specific prices of US term life insurance contracts in 1990-96" for individuals aged 60 in each calendar year. Our main finding is that the mortality patterns inferred from these prices indicate a continued decline in cohort-specific mortality at rates equal to or greater than recent historical trends; about a 5 percent reduction in relative terms in the mortality hazards per successive cohort.
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Suggested Citation

  • Mullin, Charles & Philipson, Tomas J., 1997. "The Future of Old-Age Longevity: Competitive Pricing of Morality Contingent Claims," Working Papers 134, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    • Handle: RePEc:zbw:cbscwp:134
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    1. Skinner, Jonathan, 1985. "The Effect of Increased Longevity on Capital Accumulation," American Economic Review, American Economic Association, vol. 75(5), pages 1143-1150, December.
    2. Tomas Philipson & John Cawley, 1999. "An Empirical Examination of Information Barriers to Trade in Insurance," American Economic Review, American Economic Association, vol. 89(4), pages 827-846, September.
    3. Clark, Robert L & Kreps, Juanita & Spengler, Joseph J, 1978. "Economics of Aging: A Survey," Journal of Economic Literature, American Economic Association, vol. 16(3), pages 919-962, September.
    4. Posner, Richard A., 1995. "Aging and Old Age," University of Chicago Press Economics Books, University of Chicago Press, number 9780226675664, Febrero.
    5. Wright, Kenneth M., 1992. "The life insurance industry in the United States : an analysis of economic and regulatory issues," Policy Research Working Paper Series 857, The World Bank.
    6. Jonathan Skinner, 1991. "Individual Retirement Accounts: A Review of the Evidence," NBER Working Papers 3938, National Bureau of Economic Research, Inc.
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    3. Milevsky, Moshe A. & David Promislow, S., 2001. "Mortality derivatives and the option to annuitise," Insurance: Mathematics and Economics, Elsevier, vol. 29(3), pages 299-318, December.

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