Rafal Chomik and John Piggott

This note looks at the treatment of wealth in the income and assets tests that comprise the Age Pension means test. We demonstrate how the tests interact, the extent to which different assets are treated equally and whether the income and assets tests interact effectively across the asset distribution. Policymakers have equalised treatment of some asset classes but have been reluctant to go further.

Recent reforms have made the means test more aggressive with respect to assessable assets. This recognises the value of not only asset income but the underlying capital value. We show how a similar outcome can be achieved by implementing a comprehensive income test alongside deemed income rates that increase with assets. 

Rafal Chomik and John Piggott

This paper offers a discussion of adequacy of retirement benefits. We have the Australian context in mind, but introduce extensive international comparisons to provide perspective. We cover possible benchmarks against which to set benefits, how these might change depending on household structure, the actual levels at which different countries set basic and minimum pension levels, related taxation policy, and the policies and rationale for benefit indexation.

We focus primarily on adequacy in the context of poverty alleviation, but also investigate the idea of defining the adequacy of income replacement. This includes a discussion of design features that increase the likelihood that the retirement system will provide adequate income replacement and the measures that can guide our assessment of the outcomes. 

Cagri Kumru and Arm Nakornthab

We study the interaction between estate taxation and annuity demand both analytically and quantitatively. Our quantitative model is rich enough to capture the important features of the economy such as business investment, borrowing constraints, estate transmission, and wealth inequality. Having entrepreneurs in the model is essential to generate a realistic wealth distribution and analyze non-entrepreneurs (workers) and entrepreneurs' annuity demands separately.

The simple analytical model gives the direction of the relationship between estate tax rates and annuity demand: lower estate tax rates result in lower annuity demands. The quantitative model shows that annuity demand is indeed sensitive to the changes in the estate tax system. Removing the estate tax rate reduces the annuity demand substantially when the government's budget is balanced with an increase in the proportional income tax rate. 

Zixi Li, Adam W. Shao and Michael Sherris

Multiple state functional disability models do not generally include systematic trend and uncertainty. We develop and estimate a multi-state latent factor intensity model with transition and recovery rates depending on a stochastic frailty factor to capture trend and uncertainty. We estimate the model parameters using U.S. Health and Retirement Study (HRS) data between 1998 and 2012 with Monte Carlo maximum likelihood estimation method.

The model shows significant reductions in disability and mortality rates during this period and allows us to quantify uncertainty in transition rates arising from the stochastic frailty factor. Recovery rates are very sensitive to the stochastic frailty. There is an increase in expected future lifetimes as well as an increase in future healthy life expectancy. 

George Kudrna

This report summarises the results obtained by Kudrna (2015) for the effects of hypothetical changes in the existing taper rate of the Age Pension income test.

Using an overlapping generations (OLG) model stylised to the Australian economy, Kudrna examined the implications of changing the income taper for lifecycle labour supply, consumption and savings of households, for key macroeconomic and fiscal aggregates and for household welfare. 

Torben M. Andersen

How should pensions be taxed? In many cases pension savings are usually taxed more leniently than other forms of savings. What is the rationale for this? And are those concerns best targeted via taxation or mandatory pension savings?

These issues are discussed with outset in the experience of the Scandinavian countries (Denmark and Sweden). These countries are also interesting because they have implemented a dual income taxation scheme; i.e. they pursue an ETT-taxation regime vis a vis pensions. It is argued that the incentive structure related to pension savings and retirement can not be seen independently from how private pensions (and savings more generally) affect public pensions via meanstesting. 

Christian Keuschnigg

The gains in life expectancy are expected to double the dependency ratio and increase population by 10% in Switzerland until 2050. To quantify the effects on pensions, taxes and social contributions, we use an overlapping generations model with five margins of labor supply: labor market participation, hours worked, job search, retirement, and on-the-job training.

A passive fiscal strategy would be very costly. A comprehensive reform, including an increase in the effective retirement age to 68 years, may limit the tax increases to 4 percentage points of value added tax and reduce the decline of per capita income to less than 6%.

Jukka Lassila and Tarmo Valkonen

We study transitions from EET tax regime to TEE regime in a defined-benefit pension scheme with a numerical overlapping generations model, using stochastic mortality projections as inputs. In a traditional pension scheme with no automatic longevity rules, such as a link between life expectancy and pensions or retirement age, the tax regime shift can be used to improve public finances, when longevity increases.

Diminished private saving and weaker labour supply incentives are among the downsides. Especially the latter makes the reform welfare-reducing, if the improvement in state finances is not used to relieve taxation of labour.

Bernd Genser and Robert Holzmann

Pension policy reforms across the world in recent decades are a reaction to the changing demographic and socioeconomic environment. While pension scheme redesign has received much attention, the tax treatment of contributions, returns, and benefits of retirement savings remains mostly unattended and the taxation of internationally portable pensions is terra incognita for economists.

This paper focuses on the huge differences in old-age pension taxation within and across OECD countries and highlights fiscal equity and efficiency issues that emerge in a world of internationally mobile workers and pensioners. It highlights that pension taxation differs widely not only across countries but also across pension pillars within a country, creating savings and mobility distortions and fiscal equity problems at individual and country level. 

Carl Emmerson and Paul Johnson

Private pension saving is hugely important in the UK and traditionally the taxation of pensions has been relatively stable and rather generous, beyond the treatment offered by an expenditure tax regime. Recently, though, there have been substantial changes. Annual and lifetime allowances have been cut dramatically, largely as a way of increasing tax revenues. At the same time the requirement to annuitise pension wealth has been abolished, making pension saving look much more similar to other forms of saving.

Meanwhile the tax treatment of other important forms of saving has been made more generous. The motivation for many of the reforms enacted has been largely one of increasing tax revenues. They have been encouraged by a misunderstanding of the purpose, and cost, of the current system. T

Axel Borsch-Supan and Christopher Quinn

The paper motivates and describes the tax treatment of German retirement benefits and pensions after the 2005 reform initiated by the German Federal Constitutional Court. The main question is whether this reform has produced a “level playing field” among the many instruments generating retirement income in Germany.

The paper briefly outlines rational principles for the taxation of retirement benefits and pensions and compares these with current practice in Germany and abroad.

Mengyi Xu, Michael Sherris and Ramona Meyricke

Insurers and pension funds provide life annuities and pensions that are impacted by both aggregate mortality improvement and individual mortality heterogeneity. Aggregate population mortality trends have shown significant improvement over long periods of time. Individual mortality heterogeneity arises from differing risk characteristics across individuals.

This paper assesses the extent that systematic mortality improvement varies with individual risk characteristics. To do this, a Lee-Carter model is used to assess if mortality improvement varies for groups of individuals with similar risk characteristics along with an individual mortality model that allows for heterogeneity with time trends to assess systematic risk.

Cagri S. Kumru, John Piggott and Athanasios C. Thanopoulos

This study analyzes the relative performance in terms of welfare of the current US PAYG system compared to an array of cost equivalent alternative specifications of means-tested pension programs.

We conduct our analysis under two different settings. While in the first setting, individuals have standard preferences, in the second setting individuals have self-control preferences. We show that the implications of the reform substantially differs across the two settings.

Hal Kendig, Kate O’Loughlin, Rafat Hussain, Karla Heese and Lisa Cannon

Attitudes to Intergenerational Equity: Baseline Findings from the Attitudes to Ageing in Australia (AAA) Study. This paper reports preliminary findings and methodology from the 2009-10 baseline data from the national Attitudes to Ageing in Australia (AAA) survey in the context of related national and international literature.

It reviews socio-economic and policy developments as possible influences on intergenerational attitudes from the time of the baseline survey to the 2015-16 survey round currently underway. Findings are presented on socio-economic variations in perceptions of the life-long opportunities of the baby boom cohort compared to earlier and later cohorts, the age fairness of government benefits and policy changes, including raising the pension eligibility age. Future research directions are outlined.

George Kudrna and Chung Tran

This study quantifies the macroeconomic and welfare effects of three proposed fiscal measures to eliminate Australian government budget deficits and to reduce public debt by 2030, namely: (i) temporary income tax hikes; (ii) temporary consumption tax hikes (increases in the GST rate); and (iii) temporary transfer payment cuts. Our quantitative analysis is based on a computable overlapping generations (OLG) model that is tailored to the Australian economy.

The simulation results indicate that all three examined fiscal measures result in favourable long-run macroeconomic and welfare outcomes, but severe adverse consequences during the fiscal consolidation period.

Erik Hernæs, Simen Markussen, John Piggott, Knut Røed

We exploit a comprehensive restructuring of the early retirement system in Norway in 2011 to examine labor supply responses to pension reform strategies that rely on changes in work incentives (flexibility) or access ages (prescription), respectively.

We find that increasing the returns to work is a powerful policy: The removal of an earnings test, implying a doubling of the average net take-home wage, led to an increase in average labor supply by 7 hours per week (30%)  at age 63 and by 8 hours (46%)  at age 64. The responses primarily came at the extensive margin.  

Cagri S. Kumru, John Piggott and Athanasios C. Thanopoulos

This study analyzes the relative performance in terms of welfare of the current US PAYG system compared to an array of cost equivalent alternative specifications of means-tested pension programs. We conduct our analysis under two different settings. While in the first setting, individuals have standard preferences, in the second setting individuals have self-control preferences. We show that the implications of the reform substantially differs across the two settings.

Jennifer Alonso-Garcia and Pierre Devolder

The notional defined contribution pension scheme combines pay-as-you-go financing and a defined contribution pension formula. The return on contributions is based on an index set by law, such as the growth rate of GDP, average wages, or contribution payments. The volatility of this return compromises the system's pension adequacy and therefore guarantees may be needed. Here we provide a minimum return guarantee to the pension contributions.

The price is calculated in a utility indifference framework. We obtain a closed-form solution for a general dependence structure with exponential preferences and in presence of stochastic short interest rates.

Yang Shen, Michael Sherris and Jonathan Ziveyi

We present a numerical approach to the pricing of guaranteed minimum maturity benefits embedded in variable annuity contracts in the case where the guarantees can be surrendered at any time prior to maturity that improves on current approaches. Surrender charges are important in practice and are imposed as a way of discouraging early termination of variable annuity contracts.

We formulate the valuation framework and focus on the surrender option as an American put option pricing problem and derive the corresponding pricing partial differential equation by using hedging arguments and Itô's Lemma. Given the underlying stochastic evolution of the fund, we also present the associated transition density partial differential equation allowing us to develop solutions.

Rafal Chomik, John Piggott, Alan Woodland, George Kudrna and Cagri Kumru

Means testing can balance the need for adequate incomes in retirement with economic efficiency objectives to an extent that is seldom appreciated by policymakers. It is an inexpensive way of ensuring a minimum level of retirement income. The means test may create disincentives to work and save for those wishing to target a certain benefit level, but such distortions are dwarfed by disincentives from much larger earnings related pensions with associated payroll taxes or social insurance premiums.

This paper summarises means testing design and implementation issues as well as tackling a key criticism relating to the claimed distortions created by means testing. In doing so, we discuss a number of recent analytical and empirical insights based on state of the art macroeconomic modelling.

Cagri Kumru and John Piggott

This paper studies the interaction between capital income taxation and a means tested age pension in the context of an overlapping generations model, calibrated to the UK economy.

Recent literature has suggested a rehabilitation of capital income taxation predicated on the idea that a capital income tax may be a partial substitute for the optimal age-based taxes when they are infeasible. This leads naturally to the conjecture that a publicly funded age pension contingent upon holdings of capital or capital income may have a similar effect. We formalize this using a stochastic OLG model with multiple individuals differentiated by labour productivity and pension entitlements.

Bei Lu, Zhenzhen Yang, John Piggott and Hong Mi

Understanding subjective life expectancy (SLE) is critical for pension design and longevity insurance markets. Yet there are very few studies that focus on this question.

This paper is the first of its kind to analyse subjective life expectancy in China. It draws on a recent longitudinal survey data (two years) in which participants were asked about their life expectancies. 

Jessica Loke

For many countries, age pension expenditure will increase dramatically over the next few decades due to a shift in demographics. In the literature, research and solutions have mostly been concerned with separate financing systems, such as pay-as-you-go, means-testing and superannuation. A broad comparison between the systems has received limited attention.

This paper examines the cost and economic welfare of these programs using a stochastic overlapping generations model calibrated to the Australian economy. Including the benchmark, eight different models are evaluated. In addition to reducing fiscal burden, analysis indicates that models with an enforced savings component result in increased social welfare as agents accumulate large asset stockpiles allowing them, in aggregate terms, to consume more with a lower labour supply.

Bernd Genser

In the last decades all over the world pension policy reforms have tried to account for the changing demographic and socio-economic framework. An excellent starting point for economic analyses of reform strategies is the Mirrlees Review which argues that pension policy should simultaneously address pension benefit design and the taxation of pensions.

We focus on old-age pension taxation and address policy conflicts which come along with international migration of citizens as employees and pensioners. The widely implemented system of deferred income taxation of pensions benefits generates problems of international tax equity when workers who were exempted from income tax on their old-age pension saving emigrate and receive pension benefits in another country.

Robert Holzmann

A rising share of individuals are spending at least some part of their working life abroad and acquiring pension rights. While the portability of pensions and other social benefits has received some analytical attention over the recent decade, limited analytical guidance currently exists on the taxation of retirement provisions within a country, and none for the taxation of internationally portable pensions.

For both national and international taxation of pensions, the actual taxation approaches are characterized by a high level of diversity, complexity, and inconsistency within and across countries that risk harming labor mobility and creating fiscal unfairness. 

Bei Lu, Xiaoting Liu and John Piggott

Long-term care (LTC) policy in China is in its infancy, and it is highly decentralised. Where policy structures exist, they are poorly resourced. Although China’s demography is still young by developed country standards, it is ageing very rapidly, and by mid-century will have “caught up” with many countries in the developed world with respect to population ageing. LTC policy development, therefore, is becoming a priority in China. We argue that it should be formulated with population ageing as a framework.

Policy designs, which take account of and encourage, informal care provision, will be critical to the fiscally sustainable delivery of LTC. In China, informal care is sometimes seen as very scarce because of the one child policy.  With only one child, it is argued, there will be less informal care offered than in societies with larger families.

Xiaodong Fan and Jed De Varo

Using NLSY data, we show that job hopping is associated with lower wages for college graduates (but not high school graduates), controlling for ability, labor market experience, and current job tenure. The effect is most pronounced for job tenures less than one year, strongest for early-career workers, and mitigated when job hopping severs matches that were formed during economic downturns.

A model of employer learning is proposed in which prior job history signals worker ability. We analyze it both for symmetric and asymmetric employer learning, showing that the equilibrium under asymmetric learning is consistent with the evidence for college graduates.

Emily Dabbs and Cagri Kumru

Social security plays an essential role in an economy, but if designed incorrectly can distort the labour supply and savings behaviour of individuals in the economy. We explore how well the Australian means-tested pension system provides social insurance by calculating possible welfare gains from changing the settings in the current means-tested pension system.

This work has been explored by other researchers both in Australia and in other pension providing economies. However, most research ignores the fact that welfare gains can be found by reducing the cost of the programme. To exclude these trivial welfare gains, this paper fixes the cost of the system. We find that the means-tested pension system is welfare reducing, but does provide a better outcome than an equivalent costing PAYG system. 

Rafal Chomik

This Fact Sheet considers how demographic projections have changed over time and the extent to which they have conformed to real world outcomes.

Shang Wu, Anthony Asher, Ramona Meyricke and Susan Thorp

Using eight years of data drawn from the records of Australia's Centrelink agency, we describe the income, asset and decumulation patterns of over 10,000 age pensioners. Analysis of this longitudinal data set shows that age pensioners, on average, preserve both financial and residential wealth, consuming conservatively and, ultimately, passing on substantial bequests.

While younger households do run down financial wealth early in retirement, older households generally maintain their assessable asset balances, and some even manage to save. The largest falls in assets are linked to changes in household structure due to death or the breakdown of a relationship. So, as in many other developed countries, age pensioners in Australia appear to 'under-consume', holding on to assets, and even building a buffer, well into their later years.

Xiangling Liu

This paper estimates the income elasticity of house prices over a long-term time period of 1991 to 2012 for 144 LGAs in New South Wales of Australia. The income elasticity of house prices is estimated to be 0.69 by multi-factor panel data models accounting for cross-section dependence and serial correlation.

The estimate confirms a co-integrated long-run relationship between real house prices and real income. Alternatively, the income elasticity is estimated to be 0.46 using traditional spatial autoregressive models, where the spatial matrix is specified as a distance weighted matrix. The spatial effect of house price in one location is estimated significantly to be 0.84.

Xiaodong Fan

This article documents "sharp retirement" among white male workers in the United States - retirement accompanied by a discontinuous decline in labor supply. It then proposes and estimates a life-cycle model with habit persistence to explain such precipitous decline in labor supply upon retirement as workers quitting "cold turkey" to break the "work habit". Counterfactuals reveal heterogeneous responses from different retirement types.

In response to reducing Social Security benefits by 20%, individuals choosing sharp retirement respond mostly on the extensive margin by delaying retirement eight months, while individuals retire smoothly respond mostly on the intensive margin by increasing yearly labor supply and delaying retirement only one month. Comparison shows the work habit model produces more empirically plausible results than other approaches.

Xiaodong Fan, Hanming Fang and Simen Markussen

This paper analyzes the connection between two concurrent trends since 1950: the narrowing and reversal of the educational gender gap and the increased labor force participation rate (LFPR) of married women. We hypothesize that the education production for boys is more adversely affected by a decrease in the mother's time input as a result of increasing employment.

Therefore, an increase in the labor force participation rate of married women may narrow and even reverse the educational gender gap in the following generation. We use micro data from the Norwegian registry to directly show that the mother's employment during her children's childhood has an asymmetric effect on the educational achievement of her own sons and daughters.

Xiaodong Fan, Ananth Sashadri and Christopher Taber

We develop and estimate a life-cycle model in which individuals make decisions about consumption, human capital investment, and labor supply. Retirement arises endogenously as part of the labor supply decision.

The model allows for both an endogenous wage process through human capital investment (which is typically assumed exogenous in the retirement literature) and an endogenous retirement decision (which is typically assumed exogenous in the human capital literature). We estimate the model using Indirect Inference to match the life-cycle profiles of wages and hours from the SIPP data.

Yajing Xu, Michael Sherris and Jonathan Ziveyi

Cohort effects have been identified in many countries. However, some mortality models only consider the modelling and projection of age-period effects. Others, that incorporate cohort effects, do not consider cohort specific survival curves that are important for pricing and hedging purposes.

In this paper, we consider modelling mortality development on a cohort basis, propose and assess a multi-cohort mortality model in an affine framework. We model the mortality intensity with common factors that affect all the cohorts as well as cohort specific factors that only affect specific cohorts, so that the correlations among cohorts are not perfect.

Ching Choi and Peng Yu

Population ageing can contribute to a shortage in labour supply. An obvious and popular response to this is to encourage workers to delay their retirement.

While Australian labour force participation rates among older men are showing signs of increase recently after long term declines and rates among women have continued to increase gradually, these rates are still below the Organisation for Economic Co-operation and Development (OECD) average, and for most age groups they are lower than those in the USA and New Zealand and much lower than in South Korea and Japan. Delaying retirement in Australia is therefore a possible policy response to the ageing of the population.

George Kudrna

The Australian government has recently strengthened the means test of the age pension by raising the income reduction (taper) rate and also introduced labour earnings exemptions from the means testing to encourage labour supply of older Australians. This paper assesses economy-wide implications of further hypothetical changes to the means testing of the age pension that represents Australia's first pension pillar. To this end, we apply an overlapping generations (OLG) model for Australia, with the capacity to investigate changes in the taper and labour earnings exemptions.

Our results indicate that further increases in the taper combined with lower income tax rates lead to higher per capita labour supply and assets, as well as to welfare gains in the long run, while labour earnings exemptions have largely positive effects on average labour supply at older ages. Further increases in the taper also generate significant reductions in overall government spending on the pension and, therefore, could be used as an alternative policy to increasing the pension access age.

George Kudrna, Chung Tran and Alan Woodland

In this paper, we investigate two fiscal policy options to mitigate fiscal pressure arising from an ageing of Australian population: pension cuts or tax hikes. Using a computable overlapping generations model, we find that while the two policy options achieve the same fiscal goal, the macroeconomic and welfare outcomes differ significantly. Future generations prefer pension cuts, whereas current generations prefer tax hikes to finance age-related government spending commitments.

Interestingly, taxing consumption or income results in opposing effects on macroeconomic aggregates and welfare across different skill types of households. Increases in the consumption tax rate have positive effects on labour supply, domestic assets and output per capita (similarly to pension cuts), but reduce the welfare of low income households most.

Changyu Liu and Michael Sherris

Pension funds and life insurers offering annuities hold long term liabilities linked to longevity. Risk management of life annuity portfolios aims to immunize or hedge both interest rate and mortality risks. Standard fixed interest duration-convexity hedging must be adapted to allow for both interest rate and longevity risk.

We develop an immunization approach along with a delta-gamma based approach allowing for both risks incorporating models for mortality and interest rate risk. The immunization and hedge effectiveness of fixed-income coupon bonds, annuity bonds, as well as longevity bonds, is compared and assessed using simulations of portfolio surplus outcomes for an annuity portfolio. 

Man Chung Fung, Katja Ignatieva and Michael Sherris

Developing a liquid longevity market requires reliable and well-designed financial instruments. An index-based longevity swap and a cap are analysed in this paper under a tractable stochastic mortality model. The model is calibrated using Australian mortality data and analytical formulas for prices of longevity derivatives are provided. Hedge effectiveness is examined under a hypothetical life annuity portfolio subject to longevity risk.

The paper presents various hedging features exhibited by a longevity swap and a cap based on different assumptions underlying the market price of longevity risk, the term to maturity of hedging instruments, as well as the size of the underlying annuity portfolio. The results are demonstrated to have important implications for the optimal use of longevity hedging instruments with linear and nonlinear payout structures.

Severine Arnold and Michael Sherris

This paper applies cointegration techniques, developed in econometrics to model long-run relationships, to cause-of-death data. We analyze the five main causes of death across five major countries, including USA, Japan, France, England & Wales and Australia. Our analysis provides a better understanding of the long-run equilibrium relationships between the five main causes of death, providing new insights into similarities and differences in trends.

The results identify for the first time similarities between countries and genders that are consistent with past studies on the aging process by biologists and demographers. The insights from biological theory on aging are found to be reflected in the cointegrating relations in all of the countries included in the study.

Adam W. Shao, Michael Sherris and Joelle H. Fong

This paper presents a comprehensive assessment of premiums, reserves and solvency capital requirements for long-term care (LTC) insurance policies using Activities of Daily Living (ADLs) and U.S. data. We compare stand-alone policies, rider benefit policies (LTC insurance combined with whole life insurance), life care annuities (LTC insurance combined with annuities), and shared LTC insurance in terms of premium cost and solvency capital requirements.

Premiums and best-estimate reserves for generic LTC insurance policies are determined using Thiele's differential equation. Product features such as the elimination period and the maximum benefit period are compared using a simulation-based model.

George Kudrna, Chung Tran and Alan Woodland

In this paper, we develop a small open economy, overlapping generations model that incorporates non-stationary demographic transition paths to study the dynamic fiscal effects of demographic shift in Australia. Our main results are summarised as follows. First, the demographic shifts towards population ageing lead to a change in the tax base from labor income to capital/asset income and consumption. The effect on income tax revenue is non-linear along the transition paths. Second, the changes in demographic structure cause substantial increases in old-age related spending programs including health, aged care and pensions.

Significant adjustments in other government expenditures and taxes will be required to finance the larger old-age related benefits in the future. In particular, the government will have to either cut other expenditures by around 32 percent or increase consumption taxes by 28 percent by 2050 to finance these benefits. Third, the increase in survival rates, rather than the decline in fertility rates, is the main driving factor behind these fiscal costs. Fourth, increases in fertility and immigration are not effective solutions to such budget challenges.

Ermanno Pitacco

Long-term care insurance (LTCI) covers are rather recent products, in the framework of health insurance. It follows that specific biometric data are scanty, and pricing problems then arise because of difficulties in the choice of appropriate technical bases.

Different benefit structures imply different sensitivity degrees with respect to changes in biometric assumptions. Hence, an accurate sensitivity analysis can help in designing LTCI products, and, in particular, in comparing standalone products to combined products, i.e. packages including LTCI benefits and other lifetime-related benefits.

Yang Chang and Michael Sherris

Existing longevity indices commonly use age-based mortality rates or period life expectancy. We propose an alternative cohort-based value index for insurers and pension funds to manage longevity risk. This index is an expected present value of a longevity linked cash flow valued using a specied cohort mortality model and a commonly used interest rate model. Since interest rate and longevity risk are inherent with any longevity linked obligation and interest rate risk can be effectively hedged, this index will provide a better measure of the longevity risk than current indices.

Current mortality models are largely age-period based, so we develop a cohort based stochastic mortality model with age-dependent model parameters that provides realistic cohort correlation structures as an underlying basis for the value index. We show how the model improves fitting performance compared to other cohort models, particularly for very old ages, and has a familiar model formulation for financial market participants. We also demonstrate the hedge effectiveness of the index