Longevity risk, retirement savings, and financial innovation

  • Gomes Francisco Gomes Francisco
  • Joao Cocco Joao Cocco

Over the last couple of decades there have been unprecedented increases in life expectancy which have raised important concerns for retirement savings. We solve a life-cyclemodel with longevityrisk, which can be hedged through endogenous saving and retirement decisions. We investigate the benefits of financial assets designed to hedge the shocks to survival probabilities. When longevity risk is calibrated to match forward-looking projections those benefits are substantial.This lends support to the idea that such hedging should be pursued by defined-benefit pension plans on behalf of their beneficiaries. Finally, we draw implications for optimal security design.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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