Hostname: page-component-8448b6f56d-sxzjt Total loading time: 0 Render date: 2024-04-23T21:29:04.164Z Has data issue: false hasContentIssue false
  • English
  • Français

Living longer in high longevity risk

Published online by Cambridge University Press:  07 February 2020

Rachel Wingenbach ,
Jong-Min Kim  and
Hojin Jung Open the ORCID record for Hojin Jung [Opens in a new window]
Rachel Wingenbach
Affiliation:
Statistics Discipline, Division of Science and Mathematics, University of Minnesota-Morris, Morris, MN56267, USA
Jong-Min Kim
Affiliation:
Statistics Discipline, Division of Science and Mathematics, University of Minnesota-Morris, Morris, MN56267, USA
Hojin Jung*
Affiliation:
Department of Economics, Jeonbuk National University, Jeonju-si, Jeollabuk-do54896, Korea
*
*Corresponding author. E-mail: hojin.jung@jbnu.ac.kr
Get access

Abstract

There is considerable uncertainty regarding changes in future mortality rates. This article investigates the impact of such longevity risk on discounted government annuity benefits for retirees. It is critical to forecast more accurate future mortality rates to improve our estimation of an expected annuity payout. Thus, we utilize the Lee–Carter model, which is well-known as a parsimonious dynamic mortality model. We find strong evidence that female retirees are likely to receive more public lifetime annuity than males in the USA, which is associated with systematic mortality rate differences between genders. A cross-country comparison presents that the current public annuity system would not fully cover retiree's longevity risk. Every additional year of life expectancy leaves future retirees exposed to high risk, arising from high volatility of lifetime annuities. Also, because the growth in life expectancy is higher than the growth of expected public pension, there will be a financial risk to retirees.

Keywords

Lee–Carter modellongevity riskmortality rate

JEL classification

J18: Public Policy J11: Demographic Trends, Macroeconomic Effects, and Forecasts
Type
Research Papers
Information
Journal of Demographic Economics , Volume 86 , Issue 1 , March 2020 , pp. 47 - 86
Copyright
Copyright © Université catholique de Louvain 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Balia, Silvia and Jones, Andrew M. (2008) Mortality, lifestyle and socio-economic status. Journal of Health Economics 27(1), 1–26.CrossRefGoogle ScholarPubMed
Barrieu, Pauline, Bensusan, Harry, El Karoui, Nicole, Hillairet, Caroline, Loisel, Stéphane, Ravanelli, Claudia and Salhi, Yahia (2012) Understanding, modelling and managing longevity risk: key issues and main challenges. Scandinavian Actuarial Journal 2012(3), 203–231.CrossRefGoogle Scholar
Biffis, Enrico and Blake, David P. (2009) Mortality-linked securities and derivatives. Discussion Paper PI0829, p. Cass Business School.CrossRefGoogle Scholar
Bisetti, Emilio, Favero, Carlo A., Nocera, Giacomo and Tebaldi, Claudio (2017) A multivariate model of strategic asset allocation with longevity risk. Journal of Financial and Quantitative Analysis 52(5), 2251–2275.CrossRefGoogle Scholar
Boldrin, Michele, De Nardi, Mariacristina and Jones, Larry E. (2015) Fertility and social security. Journal of Demographic Economics 81(03), 261–299.CrossRefGoogle Scholar
Booth, Heather (2006) Demographic forecasting: 1980 to 2005 in review. International Journal of Forecasting 22(3), 547–581.CrossRefGoogle Scholar
Booth, Heather, Hyndman, Rob J., Tickle, Leonie, and De Jong, Piet (2006) Lee-Carter mortality forecasting: a multi-country comparison of variants and extensions. Demographic Research 15(9), 289–310.CrossRefGoogle Scholar
Booth, Heather, Maindonald, John and Smith, Len (2002) Applying Lee-Carter under conditions of variable mortality decline. Population Studies 56(3), 325–336.CrossRefGoogle ScholarPubMed
Brouhns, Natacha, Denuit, Michel and Vermunt, Jeroen K. (2002) A Poisson log-bilinear regression approach to the construction of projected lifetables. Insurance: Mathematics and Economics 31(3), 373–393.Google Scholar
Cairns, Andrew J. G., Blake, David and Dowd, Kevin (2006) A two-factor model for stochastic mortality with parameter uncertainty: theory and calibration. Journal of Risk and Insurance 73(4), 687–718.CrossRefGoogle Scholar
Cairns, Andrew J. G., Blake, David, Dowd, Kevin, Coughlan, Guy D., Epstein, David, Ong, Alen, and Balevich, Igor (2009) A quantitative comparison of stochastic mortality models using data from England and Wales and the United States. North American Actuarial Journal 13(1), 1–35.CrossRefGoogle Scholar
Cocco, Joao F. and Gomes, Francisco J. (2012) Longevity risk, retirement savings, and financial innovation. Journal of Financial Economics 103(3), 507–529.CrossRefGoogle Scholar
Cossette, Hélene, Delwarde, Antoine, Denuit, Michel, Guillot, Frédérick and Marceau, Étienne (2007) Pension plan valuation and mortality projection: a case study with mortality data. North American Actuarial Journal 11(2), 1–34.CrossRefGoogle Scholar
Deaton, Angus S., and Paxson, Christina (2001) Themes in the Economics of Aging. Chicago, U.S.A.: University of Chicago Press, 129–170.CrossRefGoogle Scholar
Debón, Ana, Montes, F. and Puig, F. (2008) Modelling and forecasting mortality in Spain. European Journal of Operational Research 189(3), 624–637.CrossRefGoogle Scholar
De Waegenaere, Anja, Melenberg, Bertrand and Stevens, Ralph (2010) Longevity risk. De Economist 158(2), 151–192.CrossRefGoogle Scholar
Dowd, Kevin, Cairns, Andrew J. G. and Blake, David (2006) Mortality-dependent financial risk measures. Insurance: Mathematics and Economics 38(3), 427–440.Google Scholar
Fong, Joelle H. Y., Mitchell, Olivia S. and Koh, Benedict S. K. (2011) Longevity risk management in Singapore's National Pension System. Journal of Risk and Insurance 78(4), 961–982.CrossRefGoogle Scholar
Frassi, Benedetta, Pammolli, Fabio and Regis, Luca (2017) The potential costs of longevity risk on public pensions. Evidence from Italian Data. Working Paper.Google Scholar
Friedberg, Leora, and Webb, Anthony (2007) Life is cheap: using mortality bonds to hedge aggregate mortality risk. The BE Journal of Economic Analysis & Policy 7(1), 1–33.Google Scholar
Hári, Norbert, De Waegenaere, Anja, Melenberg, Bertrand and Nijman, Theo E. (2008) Longevity risk in portfolios of pension annuities. Insurance: Mathematics and Economics 42(2), 505–519.Google Scholar
Hyndman, Rob J., Booth, Heather and Yasmeen, Farah (2013) Coherent mortality forecasting: the product-ratio method with functional time series models. Demography 50(1), 261–283.CrossRefGoogle ScholarPubMed
Hyndman, Rob J. and Ullah, Md Shahid (2007) Robust forecasting of mortality and fertility rates: a functional data approach. Computational Statistics & Data Analysis 51(10), 4942–4956.CrossRefGoogle Scholar
Koijen, Ralph S. J., Nijman, Theo E. and Werker, Bas J. M. (2010) Optimal annuity risk management. Review of Finance 15(4), 799–833.CrossRefGoogle Scholar
Koka, Katerina and Kosempel, Stephen (2014) A life-cycle analysis of ending mandatory retirement. Economic Modelling 38, 57–66.CrossRefGoogle Scholar
Lantz, Paula M., House, James S., Lepkowski, James M., Williams, David R., Mero, Richard P. and Chen, Jieming (1998) Socioeconomic factors, health behaviors, and mortality: results from a nationally representative prospective study of US adults. JAMA 279(21), 1703–1708.CrossRefGoogle ScholarPubMed
Lee, Ronald D. and Carter, Lawrence R. (1992) Modeling and forecasting US mortality. Journal of the American Statistical Association 87(419), 659–671.Google Scholar
Lee, Ronald and Miller, Timothy (2001) Evaluating the performance of the Lee-Carter method for forecasting mortality. Demography 38(4), 537–549.CrossRefGoogle ScholarPubMed
Li, Nan, Lee, Ronald and Tuljapurkar, Shripad (2004) Using the Lee-Carter method to forecast mortality for populations with limited data. International Statistical Review 72(1), 19–36.CrossRefGoogle Scholar
Mitchell, Olivia S., Piggott, John, Sherris, Michael and Yow, Shaun (2006) Financial innovation for an aging world. Technical Report, National Bureau of Economic Research.CrossRefGoogle Scholar
O'Hare, Colin and Li, Youwei (2012) Explaining young mortality. Insurance: Mathematics and Economics 50(1), 12–25.Google Scholar
Olivieri, Annamaria and Pitacco, Ermanno (2003) Solvency requirements for pension annuities. Journal of Pension Economics and Finance 2(02), 127–157.CrossRefGoogle Scholar
Pestieau, Pierre and Ponthiere, Gregory (2016) Longevity variations and the welfare state. Journal of Demographic Economics 82(02), 207–239.CrossRefGoogle Scholar
Plat, Richard (2009) On stochastic mortality modeling. Insurance: Mathematics and Economics 45(3), 393–404.Google Scholar
Poterba, James M., Venti, Steven F. and Wise, David A. (2000) Saver behavior and 401 (k) retirement wealth. The American Economic Review 90(2), 297–302.CrossRefGoogle Scholar
Ramsay, James, and Silverman, Bernard (2005) Functional Data Analysis. New York, U.S.A.: Springer.CrossRefGoogle Scholar
Renshaw, Arthur E. and Haberman, Steven (2003) Lee-Carter mortality forecasting with age-specific enhancement. Insurance: Mathematics and Economics 33(2), 255–272.Google Scholar
Renshaw, Arthur E. and Haberman, Steven (2006) A cohort-based extension to the Lee-Carter model for mortality reduction factors. Insurance: Mathematics and Economics 38(3), 556–570.Google Scholar
Sherris, Michael, and Wills, Samuel (2008) Financial innovation and the hedging of longevity risk. Asia-Pacific Journal of Risk and Insurance 3(1), 52–64.CrossRefGoogle Scholar
Spedicato, Giorgio Alfredo (2013) Lifecontingencies package: performing financial and actuarial mathematics calculations in R. Journal of Statistical Software 55(10), 1–36.CrossRefGoogle Scholar
Spedicato, Giorgio Alfredo and Clemente, Gian Paolo (2016) Mortality projection with demography and Lifecontingencies packages.Google Scholar
Stevens, Ralph, De Waegenaere, Anja and Melenberg, Bertrand (2010) Longevity risk and Hedge effects in a portfolio of life insurance products with investment risk. Technical Report, Tilburg University.CrossRefGoogle Scholar
Wang, Hong, Koo, Bonsoo and O'Hare, Colin (2016) Retirement planning in the light of changing demographics. Economic Modelling 52, 749–763.CrossRefGoogle Scholar
Witkowski, Jakub (2017) Behind the Lee-Carter model. Working Paper.Google Scholar
Wood, Simon N. (2000) Modelling and smoothing parameter estimation with multiple quadratic penalties. Journal of the Royal Statistical Society: Series B (Statistical Methodology) 62(2), 413–428.CrossRefGoogle Scholar