Financial risk due to increasing life expectancy is underestimated and will press hard on the budget of developed countries, the IMF’s bi-annual report said about global financial stability. Assumptions generally taken into account when assessing pension commitments may not taking into account adequately the evolution of life expectancy of the world population. “If by 2050 increase of the average life expectancy will be three years over the current estimates, the age-related costs, already high, will increase by 50%”, the report said.
At a global level, this increase would be equivalent to tens of billions of dollars, and the longevity risk will threaten the viability of public finances in the years and decades to come, complicating efforts to re-balance long-term public finances, given the current budgetary difficulties. IMF recommends governments to mitigate the effect of increased life expectancy risk to combine several measures, namely increasing the retirement age, mandatory or voluntary, increase contributions to retirement funds and pension cuts.
The authorities must also recognize population exposure to longevity and put in place methods for more balanced sharing of risks between governments, sponsors of pension plans and individuals. Also, governments should promote the development of capital markets for the transfer of longevity risk from pension funds, to provide more effective information about the increase of life expectancy and better education in the financing of pensions.
The report shows that the best policy will be retirement age correlation with the real evolution of longevity, preferably by automatic or periodic adjustments, using a mathematical formula to avoid a recurring public debate on this issue. Increasing the retirement age can be achieved in two ways, either by increasing the period of pension contribution, or by reducing the pension payment period, according to the IMF.
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