Would you Prefer your Retirement Income to Depend on your Life Expectancy?

Abstract

We study the demand for retirement income of agents who gradually learn about their life expectancy. For a given expected budget, temporally risk-averse agents prefer that pension levels respond to incoming information about life ex- pectancy rather than being fixed ex-ante. Indeed, this offers a hedging strategy that couples shorter lives with higher consumption levels, and longer lives with lower consumption levels. A calibrated life-cycle model provides an order of mag- nitude of the effects at play.