The economics of sharing macro-longevity risk

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Pension funds face macro-longevity risk or uncertainty about future mortality rates. We analyze macro-longevity risk sharing between cohorts in a pension scheme as a risk management tool. We show that the optimal risk-sharing rule and the welfare gains from
risk sharing largely depend on the retirement age policy. In case of a fixed retirement age welfare gains from sharing macro-longevity risk measured on a 10-year horizon are between 0.1 and 0.3 percent of certainty equivalent consumption after retirement for each cohort. By
contrast, if the retirement age is fully linked to changes in life expectancy, welfare gains are substantially higher. In this case the risk bearing capacity of workers is particularly large because their labor supply acts as a hedge against macro-longevity risk. As a result, workers absorb risk from retirees in the optimal risk-sharing rule, thereby increasing the welfare gain for each cohort up to 1.8 percent in the Lee-Carter mortality model and up to 2.9 percent in
the Cairns-Blake-Dowd model.
Original languageEnglish
JournalInsurance: Mathematics and Economics
Publication statusE-pub ahead of print - 1 Nov 2020

JEL classifications

  • d61 - "Allocative Efficiency; Cost-Benefit Analysis"
  • g22 - "Insurance; Insurance Companies"
  • j26 - "Retirement; Retirement Policies"
  • j32 - "Nonwage Labor Costs and Benefits; Private Pensions"


  • macro-longevity risk
  • risk sharing
  • welfare analysis
  • retirement age

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