Linking Pensions to Life Expectancy

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Increases in pensionable age, described in Chapter 1 above, are only one policy response to the fact that people are living longer. Around half of OECD countries have elements in their mandatory retirement‐income provision that provide an automatic link between pensions and a change in life expectancy. This is a result of: i) mandatory defined‐contribution schemes substituting for or adding to public pension provision; ii) transformation of public, earnings‐related plans into notionalaccounts schemes; and iii) a link between benefit levels or qualifying conditions for pensions and life expectancy. Furthermore, there has been a marked shift from defined‐benefit to defined‐contribution provision in voluntary, private pensions. These changes have important implications for the way the cost of providing for pensions as life expectancy increases is shared. Increasingly, this will be borne by individual retirees in the form of lower benefits. This chapter measures the degree of uncertainty inherent in projections of life expectancy. Pension entitlements for example individuals in all 34 OECD countries are calculated under different scenarios ‐ from slow to rapid increments in longevity. These calculations are then used to assess the degree to which the additional cost of longer lives has been shifted onto future generations of retirees with longer life expectancy.

Document Type: Review Article

Publication date: March 1, 2011

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