Annuity Markets and Retirement Income Security
Friday, Jan. 5, 2018 10:15 AM - 12:15 PM
- Chair: James Poterba, Massachusetts Institute of Technology and NBER
Survival Ambiguity and Welfare
AbstractNearly all lifecycle models adopt Yaari’s (1965) assumption that individuals know the survival probabilities that they face. Given that an individual’s exact survival probabilities are likely unknown, we explore the implications of relaxing this assumption. If there is no annuity market, then the welfare cost of survival ambiguity is large and regressive. Individuals would pay as much as 1% of total lifetime consumption for immediate resolution of the ambiguity, and the bottom income quintile is four times worse off than the top quintile. Alternatively, with the availability of competitive annuity contracts, survival ambiguity is welfare improving because it allows competitive insurance markets to pool risk across survival types. Even though Social Security and annuities share some properties, Social Security does not help to hedge survival ambiguity.
New Evidence on the Choice of Retirement Income Strategies: Annuities vs. Other Options
AbstractThis paper exploits rich longitudinal data on the contribution behavior and subsequent distribution decisions of the participants in a large, multi-employer, defined contribution pension plan (TIAA). The data set tracks participants over more than a decade, and it provides new evidence on the heterogeneity of participants’ draw-down strategies. Only a minority of participants follow the strategy of accumulating until they retire, and then either purchasing an annuity or rolling their plan balance to an IRA. Many participants defer distributions until many years after their last contribution. Among those who annuitize, annuitizing part of the plan accumulation is more common than annuitizing the entire accumulation. The paper concludes with a discussion of which of these findings are consistent with standard lifecycle models, and which are difficult to explain in this framework.
Competition, Asymmetric Information, and the Annuity Puzzle: Evidence from a Government-run Exchange in Chile
AbstractGovernment-run exchanges, public platforms where private firms and consumers trade, are gaining popularity to improve the efficiency of insurance markets. We focus on the platform for purchasing annuities for retirees in the Chilean privatized pension system. Voluntary annuitization of retirement wealth is very common, with more than 60% of retirees purchasing a private annuity through the exchange. In contrast, less than 5% of US retirees purchase annuities, despite theoretical predictions that annuitization should be higher. Using a novel individual-level dataset, we provide new evidence that consumers select based on private information into differentiated intermediaries, firms, and contract types, in addition to adverse selection into annuities as a whole. We set up a structural life-cycle model of consumer demand for annuities to study the welfare implications of firm differentiation, competition and endogenous selection of unobservable types into retirement products. This model allows us to simulate counterfactuals where the alternative to annuitization is analogous to the US, and propose three reasons that may be driving Chilean retirees to annuitize at a higher rate than US retirees: 1) the design of the government-mandated “outside option” to annuitization, 2) lower markups, and 3) firms’ ability to price on many consumer characteristics, leading to lower levels of adverse selection.
North Carolina State University
University of California-Berkeley
- H8 - Miscellaneous Issues
- G2 - Financial Institutions and Services