Longevity, Systemic Models and Business Risk

2. The evolution of social models of longevity risk cover
The extension of human life does not — nor will it — necessarily eliminate the volatility of the length of the lives of individuals; rather, volatility (the downside in the following examples) is or may be accentuated by social phenomena, such as the so called Saturday night carnage, or blind terrorist attacks, which on an individual level tend to weaken, rather than strengthen — the (at least perceived) certainty of a longer life.
Also the phenomenon of so-called rectangularisation of the longevity function (Pitacco), and of the covergence of the way and means of distribution and of both moving towards the most extreme age on the distribution curve of the age of death, should not be translated into an automatic financialisation of the final stage of the life cycle. Recent studies6 have also shown that the chance of spending all one’s accumulated savings before the end of life is real and significant, although it depends on the allocation of available assets.
If the tautological saying of B. Franklin still holds true (nothing is more certain than death and taxes) it is equally true that for individuals nothing is less certain than the time of death.
Before state pension systems were created, during the long centuries of pre-industrial society, the demographic risk in its double and symmetrical guise of risk of mortality and risk of longevity obviously existed but were de facto managed within the — often numerous — family. The early death of the only source of income implied mobilising the family’s energies, often with dramatic consequences for expectations of personal growth. Social communities, which were often small and with strong local roots, were able to provide support to some extent. Longevity too was managed in the family, thanks to the numerous family members, the absence of women on the labour market and the early exit of young people from the education system. To sum up the situation in the vocabulary of political philosophy, it certainly was a co-operative system based on voluntary relationships, hinging on the family but fundamentally independent from the market.
In his well known and visionary The new financial order: risk in 21st century, Robert Shiller provides an effective synthesis of the family’s role as an intergenerational risk management mechanism, and states that intergenerational social security systems are a formalisation of the roles played by the family which, in the past, was the main mechanism for the sharing of risks among generations7.
That mechanism basically characterised the dynamic of human societies at different latitudes for centuries and provides a rough idea of what still occurs in less socially and economically developed countries.
In the modern western world, thanks to the initiatives by Bismarck and Beveridge in Europe and F.D. Roosevelt in the U.S., i.e. the birth and development of the Welfare State, a second stage progressively and rapidly emerges, the opposite to the first stage in its functioning principles of almost pure state monopoly. Through universal and mandatory pension systems, the state takes on the management of the longevity risk and conceptually accepts nearly the entire risk when replacement rates not far from 100% of the last income are planned and implemented.
The system is based on a fundamentally coercive logic: the state replaced a private non-market player i.e. the family. The initiative was certainly born of very good intentions of fostering inter- and intragenerational solidarity and responded to situations and developments which could hardly be tackled differently. However it also caused important repercussions, such as decreasing individual responsibilities and objectively weakening the role of the the family in social dynamics.
Although it would be extremely risky, in a modern eonomy, to rely solely on the family with its limited resources, withdrawal of its authority leaves gaps which are difficult to fill.
At the beginning of the twenty-first century, the issue of the structural scarcity of available resources means that this second stage is out of date in western countries8. The historical generosity of public systems has come up against unbreachable limits:
• in the public spending/Gross Domestic Product ratio already reached coupled with an unfavourable age class structure (Figure 1);
• in competitive globalisation, which makes the burden of that ratio difficult to sustain in many industrialised countries;
• in the ageing of the population: theoretically, when the working-age population share structurally matches the retirement-age population, in a pay-as-you-go system ensuring maintenance of full standards of living, half the available income would go to pension expenditure.

6 Albrecht and Maurer “Self-annuitization, consumption shortfall in retirement and asset allocation: the annuity benchmark”, 2002, Working papers, Wharton school.
7 Author’s translation.
8 With reference to less developed countries, the following issue appears to be very interesting, although not included in the scope of the present article: is the transition to a ‘second stage’ similar to that of the western world in the twentieth century inevitable or may a more advanced stage be implemented immediately? Lessons may be drawn from the case of Chile.

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