Equitable Longevity Risk Sharing or, the raison d'\^etre for a First Nations Pension Plan

TL;DR

This paper models equitable longevity risk sharing pools for groups with higher mortality, like First Nations in Canada, showing they can achieve comparable utility at lower costs, highlighting policy inequities.

Contribution

It introduces a stochastic model for ELRiS pools tailored to high-mortality groups, demonstrating potential cost savings and fairness improvements over traditional pension schemes.

Findings

High-mortality groups can attain similar utility with significantly lower contributions.

ELRiS pools can reduce implicit subsidies from Indigenous to non-Indigenous populations.

A small, demographically aligned pool can achieve sustainability and fairness.

Abstract

We investigate the extent to which groups with elevated mortality rates ex ante might opt out of guaranteed national pensions in favour of demographically aligned plans, which we label equitable longevity risk sharing (ELRiS) pools, even if this involves accepting some idiosyncratic risk. Technically, this paper develops a stochastic model of retirement income within an ELRiS structure that is calibrated to equate the discounted expected utility of a guaranteed national pension. The practical motivation for developing this alternative is that working members of First Nations peoples of Canada: (1) experience much higher mortality rates than average over their entire life cycle, and (2) some are actually allowed by current legislation to opt out of the Canada Pension Plan (CPP). We then demonstrate that under reasonable economic preferences and parameters, a sub-group with a 10-year life expectancy gap relative to the population could attain equivalent lifetime utility by contributing a mere two-thirds to the plan, even if they were pooled with only 30 members. For a longevity gap of 20 years, such as between an Indigenous male versus a non-Indigenous female, the contribution rate falls to less than a third. The difference between the statutory and mandatory contribution rates to a guaranteed national pension and those needed within these self-sustaining pools is an implicit subsidy from Indigenous to non-Indigenous. From a policy perspective, this paper aspires to jump-start a conversation that sparks a change in a status quo, which is obviously unfair and inequitable.