Prof Menachem Brenner, Academic Director of MSGF program in NYU Stern, was invited to be one of the consultants for the Publication by the Asian Development Bank (ADB) about Longevity Risk in China - "A Market-Based Approach to Sharing the Economic Benefits and Consequences of Aging in the People’s Republic of China"
The impressive socioeconomic development in the People’s Republic of China (PRC) has in part contributed to rapid aging of its population. As in many other countries, rapid aging poses sustainability challenges for the pension system. While much attention has been justifiably paid to the challenges posed by the favorable rising trend of life expectancy, less attention has been paid to the adverse consequences from the uncertainty surrounding this trend; that is, exposure to longevity risk. Exposure to longevity risk grows as life expectancy increases and is greater for older cohorts than younger ones, making it harder to estimate with confidence how much longer people will live. Predicting the remaining life expectancy of future cohorts of the elderly has proven particularly difficult.
Failure to mitigate this longevity risk could threaten the long-term viability of the PRC’s pension system. This brief suggests that the financial markets can offer at least a partial solution for longevity risk by jump-starting a market for longevity risk-sharing transactions in the PRC. The concept would make use of the diversity in the levels of socioeconomic development across the PRC, the country’s somewhat uniquely powerful policy tools, and the extensive internal migration patterns of its workers. It aims to strengthen the PRC’s pension system for the wealthier provinces by helping them hedge against longevity risk and, at the same time, create more fiscal space and increased fiscal flexibility for its poorer provinces.
Key Points:
Much consideration has been given to the challenges posed by rising life expectancy globally with the population of the People’s Republic of China (PRC) also aging rapidly. Limited attention has been paid to an element of this challenge—the longevity risk created by the uncertainty of the future path of this trend.
Rapid aging and the attendant longevity risk present sustainability challenges for the PRC’s pension system. The PRC needs to undertake impactful, widespread, and holistic pension reform.
Financial markets can offer a partial solution for longevity risk in the PRC by jump-starting a market for longevity risk-sharing transactions in the country. The concept would make use of the diversity in the levels of socioeconomic development between the country’s regions, the state’s somewhat uniquely powerful policy tools, and the extensive internal migration patterns of the nation’s workers.
This risk-sharing market would aim to strengthen the pension systems of the wealthier provinces by helping them hedge against longevity risk while creating more fiscal space and flexibility for the country’s poorer provinces.
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