The potential costs of Longevity Risk on Public Pensions. Evidence from Italian data

In this article, we assess, through an empirical investigation based on Italian data, how uncertainty regarding future mortality may affect public pension expenditure. Based on a representative sample of Italian pensioners from 1985 to 2011, we find a consistent underestimation of improvements seen in mortality and life expectancy when forecasts are based on expectations. The pension expenditure estimated using realized mortality rates is shown to be consistently higher than that obtained by using average forecasted scenarios, produced with well-known stochastic mortality models. The paper highlights the importance of considering the uncertainty regarding future pension benfits, i.e. of evaluating and managing the longevity risk in public pension plans.