Addressing Longevity’ Heterogeneity in Pension Scheme Design

Abstract

This paper demonstrates that the link between heterogeneity in longevity and lifetime income across countries is mostly high and often increasing; that it translates into an implicit tax/subsidy, with rates reaching 20 percent and higher in some countries; that such rates risk perverting redistributive objectives of pension schemes and distorting individual lifecycle labor supply and savings decisions; and that this in turn risks invalidating current reform approaches of a closer contribution-benefit link and life expectancy-indexed retirement age. The paper suggests and explores a number of interventions in the accumulation, benefit determination, and disbursement stages to address longevity' heterogeneity.JEL Classifications: D9, G22, H55, J13, J14, J16

Redistributive effects of different pension systems when longevity varies by socioeconomic status

“…For example, the widening of the longevity gap between the top and bottom income quintile in the US raised the present value of lifetime government benefits for the top quintile relative to the bottom by $132,000 for men and by $157,000 for women (NASEM, 2015, :11). Consequences of this kind are surely present in other countries as well, and have begun to draw broader attention (Holzmann et al, forthcoming;Ayuso et al, 2017;Lee and Sanchez-Romero, forthcoming; OECD, 2016).…”

Análise Da Crise Político-Economica Da Venezuela E Seus Impactos No Setor De Agronegócios Paraenses Entre 2012-2017

“…Ao mesmo tempo, em quase todos os países da globo, a longevidade continua a aumentar, embora de forma heterogénea entre grupos socioeconómicos (Ayuso et al 2017a(Ayuso et al ,b, 2019b. Nalguns países com baixa fecundidade (e.g., Portugal, Alemanha) e, principalmente, elevada emigração, a estrutura etária populacional assemelhar-se-á a uma pirâmide invertida (Figura 1) em que, de forma inusitada na história da humanidade, as gerações mais jovens serão em número inferior às que as precederam (Bravo e Coelho, 2019).…”

The ABCs of nonfinancial defined contribution (NDC) schemes

“…as heterogeneity changes over time, the concomitant change in benefit structure is difficult to undertake. In (N and F) DC schemes, a positive relationship between lifetime income and remaining life expectancy at retirement translates into a straight tax/subsidy mechanism with tax rates for the lowest income groups reaching in some countries 20 or even 30 per cent, and subsidy rates for the highest income group reaching similar levels. To correct such tax/subsidies and their distortionary effects, DC schemes may apply corrections at the time of annuitization by individualized life‐expectancy estimates or during the accumulation phase through differentiated contribution rates according to income level (Ayuso, Bravo and Holzmann, ). In an NDC scheme a simple way to correct for an approximately positive linear relationship between lifetime income and life expectancy at retirement consists in having a two‐tier contribution structure: one share of the total contribution rate is applied to the average period income, while the remaining share is applied – as is normally done – to the individual period income. With a total contribution rate of 20 per cent, 2 to 5 percentage points when applied to the average income but recorded at the individual account seem sufficient to correct heterogeneity effects in most OECD countries.…”

“…Any future change in heterogeneity can be reflected in periodic estimations of the required contribution split. Gender inequality in heterogeneity can be addressed by applying gender‐specific life expectancies at retirement (Ayuso, Bravo and Holzmann, ); an economically correct but politically quite likely difficult approach.…”