Annuities and individual welfare

Davidoff

Thomas

Davidoff, Thomas

Author

Brown

Jeffrey

Brown, Jeffrey

Author

Diamond

Peter

Diamond, Peter

Author

text

working paper

Chestnut Hill, Mass. Center for Retirement Research at Boston College20032003monographic

Chestnut Hill, Mass.

Center for Retirement Research at Boston College

2003

monographic

Englisheng

English

eng

electronicapplication/pdfborn digital

electronic

application/pdf

born digital

This paper advances the theory of annuity demand. First, we derive sufficient conditions under which complete annuitization is optimal, showing that this well-known result holds true in a more general setting than in Yaari (1965). Specifically, when markets are complete, sufficient conditions need not impose exponential discounting, intertemporal separability or the expected utility axioms; nor need annuities be actuarially fair, nor longevity risk be the only source of consumption uncertainty. All that is required is that consumers have no bequest motive and that annuities pay a rate of return for survivors greater than those of otherwise matching conventional assets, net of administrative costs. Second, we show that full annuitization may not be optimal when markets are incomplete. Some annuitization is optimal as long as conventional asset markets are complete. The incompleteness of markets can lead to zero annuitization but the conditions on both annuity and bond markets are stringent. Third, we extend the simulation literature that calculates the utility gains from annuitization by considering consumers whose utility depends both on present consumption and a "standard-of-living" to which they have become accustomed. The value of annuitization hinges critically on the size of the initial standard-of-living relative to wealth.

Thomas Davidoff, Jeffrey Brown, and Peter Diamond.

CRR WP2003-11

CRR WP

2003-11

http://crr.bc.edu/images/stories/Working_Papers/wp_2003-11.pdf

MChBEnglisheng

MChB

Englisheng

English

eng