Paying too fast and too slow - Heterogeneous Life Expectancy and the Swedish Public Pension System

Abstract: In many pension systems, pension benefits are calculated based on the life expectancy in the population. However, in recent years the gap in life expectancy and mortality across socioeconomic groups has been growing in Sweden and the OECD. As such, research has indicated that pension systems that are meant to be progressive may end up being regressive due to a redistribution from short-lived, low socioeconomic status groups, to long-lived, high socioeconomic status groups. In countries, such as Sweden, where an NDC scheme is part of the pension system this redistribution occurs implicitly through a homogeneous annuity divisor. In this thesis we explore the impact of how a policy shift to a heterogeneous annuity divisor would impact agent behaviour and the ex ante fairness of the system. We employ a dynamic model where we separately model and analyze three life cycles calibrated based on different levels of educational attainment in Sweden to research the impact of the policy shift. We find that the policy produces no shift in workforce participation or benefit claiming for the beneficiary of the reform (low socioeconomic agent) but a larger fraction of contributions are received as benefits. The middle agent is hardly affected by the reform and the behaviour outcome for the agent with high socioeconomic status is in part dependent on the model setup.