When can insurers offer products that dominate delayed old-age pension benefit claiming?
AbstractIt is common practice for public pension schemes to offer individuals the option to delay benefit claiming until after the normal retirement age, and increase the annual benefit level as a result. Existing literature shows that for non-liquidity constrained individuals, delaying benefit claiming for a number of years after retirement is optimal from a utility perspective in a wide variety of cases. In this paper we focus on non-liquidity constrained individuals who wish to defer pension benefits, and investigate the attractiveness of an alternative deferral strategy. The alternative deferral strategy consists of claiming benefits immediately, and using them to buy deferred annuities from an insurance company. We first determine conditions under which the accrual offered by the public pension scheme for delaying benefit claiming is less than actuarially fair from the viewpoint of an insurer who uses the prevailing term structure of interest rates to determine the expected present value of missed and additional benefits. Actuarial unfairness can be generated by, e.g., age-independent accrual rates or slow adjustments of the accrual rates to changes in interest rates. We find that, in particular for men, the degree of actuarial unfairness is such that there is ample room for insurers to profitably offer annuity products that make the alternative deferral strategy preferred to deferring benefit claiming. If individuals choose to strategically exploit these alternative deferral strategies, this will affect benefit claiming behavior in public pension schemes, which in turn affects long run program costs.
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Bibliographic InfoArticle provided by Elsevier in its journal Insurance: Mathematics and Economics.
Volume (Year): 53 (2013)
Issue (Month): 1 ()
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Web page: http://www.elsevier.com/locate/inca/505554
Pension benefit claiming; Delay options; Actuarial nonequivalence; Preference-free dominance;
Other versions of this item:
- Sanders, E.A.T. & De Waegenaere, A.M.B. & Nijman, T.E., 2010. "When Can Insurers Offer Products That Dominate Delayed Old-Age Pension Benefit Claiming?," Discussion Paper 2010-43, Tilburg University, Center for Economic Research.
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
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