Research | Funded Projects

RETIREMENT AGE AND LIFE EXPECTANCY: HOW TO FACE POPULATION AGEING

Life expectancy at birth in industrialized countries has increased by about three years in the last decade, and the United Nations estimate a further increase in the next decades. Because individuals on average are living to greater ages than they did in the past, Social Security’s benefits should be indexed for increases in lifespan in the future. Looking at the recent trends, future individuals are expected to live even longer. While living longer is a good thing for individuals, it damages Social Security’s finances because it means more and more people are spending longer and longer time in retirement collecting Social Security benefits. To face this phenomenon, future increases in life expectancy need to be incorporated in the actuarial calculations of pensions, which need to be updated regularly. Many countries have set up Social Security Systems which link retirement age and/or pension benefits to life expectancy, considering a mechanism for indexing the retirement age and/or pension benefits. In other words, longevity indexing can be done either by increasing the full retirement age or by modifying the benefit formula. In our point of view, the fairer way to do this is by indexing the retirement age.When we discuss Social Security, we have to look at how much longer people will live once they reach age 65. In this way we will have an estimate of how long they will collect benefits. Looking at the government agencies statistics, we can observe that people who have reached age 65 live longer now than they did in the past, and more people live to age 65. As aforementioned, one way of dealing with increased lifespan is to simply rise the retirement age for full benefits. Minister Fornero did just that with Law 214/2011. A fair way to handle future increases in longevity is to index the Social Security retirement age. The Fornero reform indicated that future retirement ages are increasing in line with life expectancy. In this framework, the debate in the literature outlines new solutions for flexible pension schemes for various countries. Bisetti and Favero 2014, for example, studied the impact of longevity risk on the Italian pension system. They considered the different regimes that have followed over time until the Fornero Reform, which introduced an indexation mechanism of retirement age to life expectancy. To project future mortality rates, they referred to the Lee-Carter model in its basic version. In this research, we will extend the latter findings by studying the impact of different mortality projection models on a pension system based on the indexation of retirement age. The motivation behind this proposal is to address the recent and spread need to create flexible retirement schemes for facing global ageing and the prolonging working lives. Our contribution to the available literature will be given by making forecasts on mortality rates related to the Italian male population using different models belonging to Generalised Age-Period-Cohort (GAPC) family and assessing the best fitting performances. Moreover, we will propose a methodology that allows to index the retirement age in order to keep constant the Expected Pension Period Duration (EPPD). Lastly, we will introduce a suitable index for measuring the impact of different stochastic mortality projection models on the Social security system costs.