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Annuity markets and retirement security

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  • James M. Poterba

Abstract

The growing importance of defined contribution pension arrangements has drawn increased attention to the means by which retired people draw down their assets. Current UK law requires annuitisation of at least a fraction of defined contribution plan accumulations. Annuity markets have recently attracted some criticism with respect to pricing and the available range of product options. This paper describes a key feature of voluntary annuity markets: the presence of ‘adverse selection’. This is the tendency of annuitants to live longer than non-annuitants, since individuals who know that they are likely to die soon do not purchase annuities. The paper presents information that quantifies the importance of adverse selection in the setting of private annuity prices and discusses the role of compulsory annuitisation requirements in reducing it. Requiring individuals to participate in the annuity market can reduce selection effects, at the cost of reducing individuals’ range of retirement income options.

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Bibliographic Info

Article provided by Institute for Fiscal Studies in its journal Fiscal Studies.

Volume (Year): 22 (2001)
Issue (Month): 3 (September)
Pages: 249-270.

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Handle: RePEc:ifs:fistud:v:22:y:2001:i:3:p:249-270.

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References

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  1. Friedman, Benjamin M & Warshawsky, Mark J, 1990. "The Cost of Annuities: Implications for Saving Behavior and Bequests," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 135-54, February.
  2. Martin Feldstein & Jeffrey B. Liebman, 2001. "Social Security," NBER Working Papers 8451, National Bureau of Economic Research, Inc.
    • Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  3. Jeffrey R. Brown & Olivia S. Mitchell & James M. Poterba, 1999. "The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement Program," NBER Working Papers 7005, National Bureau of Economic Research, Inc.
  4. David Blake, 1999. "Annuity Markets: Problems and Solutions," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 24(3), pages 358-375, July.
  5. Orazio Attanasio & Carl Emmerson, 2001. "Differential mortality in the UK," IFS Working Papers W01/16, Institute for Fiscal Studies.
  6. Benjamin M. Friedman & Mark Warshawsky, 1985. "The Cost of Annuities: Implications for Saving Behavior and Bequests," NBER Working Papers 1682, National Bureau of Economic Research, Inc.
  7. Olivia S. Mitchell, 2001. "Developments in Decumulation: The Role of Annuity Products in Financing Retirement," NBER Working Papers 8567, National Bureau of Economic Research, Inc.
  8. Suzanne Doyle & Olivia S. Mitchell & John Piggott, 2001. "Annuity Values in Defined Contribution Retirement Systems: The Case of Singapore and Australia," NBER Working Papers 8091, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Ferro, Gustavo, 2008. "Un impulso al mercado de rentas vitalicias en España
    [Promoting the annuities market in Spain]
    ," MPRA Paper 20211, University Library of Munich, Germany, revised Jul 2008.
  2. Ian Tonks & Edmund Cannon, 2004. "UK Annuity Rates And Pension Replacement Ratios 1957-2002," Royal Economic Society Annual Conference 2004 71, Royal Economic Society.
  3. Oded Palmon & Avia Spivak, 2007. "Adverse selection and the market for annuities," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 32(1), pages 37-59, June.
  4. Ferro, Gustavo, 2008. "On annuities: an overview of the issues," MPRA Paper 20209, University Library of Munich, Germany, revised Oct 2009.
  5. Arnaud Van Bellingen, 2007. "Quelles perspectives de développement pour le marché des annuités?," CREPP Working Papers 0701, Centre de Recherche en Economie Publique et de la Population (CREPP) (Research Center on Public and Population Economics) HEC-Management School, University of Liège.
  6. Sanders, E.A.T., 2011. "Annuity market imperfections," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4960701, Tilburg University.

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