Effects of the Hybrid Lump Sum Plan on Longevity Risk in the Public Pension System

Deferred pension benefits provide effective hedging against longevity risk, yet very few people currently opt for them in Japan. This paper proposes a new public pension plan designed to incentivize individuals to delay their pension claim and hedge longevity risk. Specifically, we propose a Hybrid Lump Sum plan (“ Hybrid plan”) that combines elements of the Lump Sum plan and the current deferred plans, achieving both the incentivization of delayed claims and mitigation of longevity risk. First, we evaluate both individual and overall longevity risk under the Hybrid plan through simulation analysis to clarify its effect. Second, through an original questionnaire survey, we show that the Hybrid plan offers a stronger incentive to delay claiming age compared to the current deferred plan. Moreover, the characteristics of deferred beneficiaries are identified using a logistic regression model. Finally, using parameters obtained from the questionnaire survey, we illustrate how the Hybrid plan can reduce overall longevity risk in some instances.