Measuring adequacy and facing longevity risk in social security

Measuring adequacy and facing longevity risk in social security

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Labour markets are undergoing major transformations mostly due to ageing population. Actuaries can play a fundamental role to ensure that social security systems continue to meet their objectives of adequacy of benefits and financing constraints. Adequacy of benefits and financial sustainability are two sides of the same matter and must be jointly considered. In the medium to long term, unsustainable pension systems may not be able to guarantee enough level of the benefits. At the same time, the financial sustainability, pursued through a compression of the benefits, may be not socially sustainable. Although it seems hard to define uniquely the Adequacy of Pensions, we can certainly state that the main objective of a system is to provide an adequate income during retirement. To measure adequacy we can consider the so-called Pension Wealth indicator (PW). PW is the ratio between the actual value, on pensionable age, of all the pension payments that are expected to be paid (generally for the entire life) and the last salary received. PW is highly related to the future mortality trends and its study may give useful information to face the longevity risk. PW can be thought as the lump-sum needed to buy an annuity giving the same cash flow as that of the old age pension. The PW is generally referred to old age pensioners, but the aim of this study is to present a redefinition of PW with reference to specific vulnerable workers: the Italian injured worker broken down by accidents and occupational diseases and by impairment level. In this sense, the indicator will also include the pension income coming from the Workers Compensation system. The old age generic PW will be compared with the injured worker’s PWs.

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