ABSTRACT
Living for a long time is a blessing and testimony to medical and economic progress; but it is also a risk. As a matter of fact, the term ‘longevity risk’ is quite familiar nowadays to financial experts, investors and fund managers, although it has gained currency only recently. The risk of premature death used to be more prominent in most people’s minds than that of a belated death and an unduly long life. Instead of ‘unduly long’ we should, perhaps, say ‘longer than anticipated’, but then at issue is not the absolute length of life that could or could not be deemed too long, but rather longevity as measured against economic security. In their non-productive years after retirement people need life annuities, but for how much and for how long? Can we make sure that we do not outlive our wealth, as individuals or societies? The impossibility of answering this question with certainty is at the root of the longevity risk. If the probability of dying at each age in the future were reliably known for a certain population, then it would be possible to design pension schemes to provide life annuities for most of its members. However, the major reason why demographic projections have had to be revised time and again is that accurate mortality forecasts have not been possible and are not possible now. That is the longevity risk. If, on average, people live longer than expected, they face the risk of finding it difficult in their final years to cover their expenses. This is the situation the Japanese national pension system is confronted with in the first decade of the new century.
