Linking retirement age to life expectancy does not lessen the demographic implications of unequal lifespans

The fact that individuals are living longer and thus spending more time in retirement challenges the sustainability of pension systems. This has forced policy makers to rethink the design of pension plans to mitigate the burden of increased longevity. Countries such as the Netherlands, Estonia, Denmark and Finland have implemented reforms that link retirement age to changes in life expectancy. However, the demographic and financial implications of such linkages are not well understood. This study analyses the Danish case, using high-quality data from population registers during the period 1985-2016. We identify trends in demographic and actuarial measures after retirement by sex and socio-economic group. We also introduce a new decomposition method to disentangle the demographic sources of socio-economic disparities in pension costs per year of expected benefits. We reach two main results. First, linking retirement age to life expectancy increases uncertainty about length of life after retirement, with the financial cost becoming more sensitive to changes in mortality. Second, socio-economic disparities in lifespans persist regardless of the age at which individuals retire. Males from lower socio-economic groups are at a greater disadvantage, because they spend fewer years in retirement, pay higher pension costs per year of expected benefits and are exposed to higher longevity risk than the rest of the population. This disadvantageous setting is magnified when retirement age is linked to life expectancy. (C) 2021 The Author(s). Published by Elsevier B.V.

Automated summary

As individuals are living longer and spending more time in retirement, the sustainability of pension systems is challenged. Some countries have linked retirement age to life expectancy in order to address this issue. However, the study finds that such linkage increases uncertainty in financial costs related to longevity risk, and socio-economic disparities in lifespans persist regardless of retirement age.