Response to updated mortality forecasts in life cycle saving and labor supply

Historical evidence shows that demographic forecasts, including mortality forecasts, have often been grossly in error. One consequence of this is that forecasts are updated frequently. How should individuals or institutions react to updates, given that these are likewise expected to be uncertain? We...

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Bibliographic Details
Published in:International journal of forecasting 2014-10, Vol.30 (4), p.1120-1127
Main Authors: Määttänen, Niku, Alho, Juha
Format: Article
Language:English
Subjects:
Demographics
Forecasting techniques
Labor supply
Life cycle saving
Markov analysis
Mortality
Rational expectations
Stochastic mortality
Studies
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Summary:Historical evidence shows that demographic forecasts, including mortality forecasts, have often been grossly in error. One consequence of this is that forecasts are updated frequently. How should individuals or institutions react to updates, given that these are likewise expected to be uncertain? We discuss this problem in the context of a life cycle saving and labor supply problem, in which a cohort of workers decides how much to work and how much to save for mutual pensions. Mortality is stochastic and point forecasts are updated regularly. A Markovian approximation for the predictive distribution of mortality is derived. This renders the model computationally tractable, and allows us to compare a theoretically optimal rational expectations solution to a strategy in which the cohort merely updates the life cycle plan to match each updated mortality forecast. The implications of the analyses for overlapping generations modeling of pension systems are pointed out.
ISSN:0169-2070
1872-8200
DOI:10.1016/j.ijforecast.2014.02.010