Last month, we talked about what longevity – or the risk of actual life span exceeding expectations – means to the economy. Now, we tackle how to manage it.
Individuals and governments should look harder into managing longevity risk; it is a related but different problem to ageing as it pertains to the risk that actual life spans will exceed expectations for individuals or whole populations. Regardless of the techniques used, longevity risk has consistently been underestimated, leading to potentially serious economic implications. While there is no doubt about the social dimension of the problem, we can evaluate possible ways to manage this risk from an economics perspective.
Role of governments
Firstly, governments should acknowledge that they face significant explicit risk (through public sector-defined benefit schemes and old age social security schemes) and implicit risk (through possible bailouts of insolvent private pension schemes due to political pressure).
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