Benefit Design, Retirement Decisions and Welfare Within and Across Generations in Defined Contribution Pension Schemes

Sammanfattning: Essay 1 (with Juha Alho and Edward Palmer): All around the world, public pension schemes are moving in the direction of non-financial (NDC) and financial defined contribution (DC) schemes.  Both rely on accurate projections of life expectancy in the creation of annuities. Accurate projections are critical for system stability, individual utility and inter-generational welfare. This paper suggests a path-breaking innovation that changes the perspective from the Lee-carter (LC) family of trend models which assume a constant rate of change in mortality over time. Our approach is to project the cohort life expectancy on basis of the specific cohort rate of change in mortality. This relaxes the strong trend assumption underlying the LC model, which is the reason why LC model does not work well in the phase of accelerating or decelerating mortality. We use unisex mortality data for $8$ countries to test the performance of our approach both ex-post and ex-ante. The ex-post experiment shows that our approach generally performs better when the rate of change in mortality is accelerating and performs as well as LC model when the rate of change is time-invariant. The ex-ante experiment, on the other hand, shows that our model almost always delivers higher projection of remaining life expectancy than the LC model for the more recent cohorts, which is consistent with the ex-post experimental results.