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Differential Mortality and the Value of Individual Account Retirement Annuities

In: The Distributional Aspects of Social Security and Social Security Reform

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  • Jeffrey Brown

Abstract

This paper examines the extent of redistribution that would occur under various annuity and bequest options as part of an individual accounts retirement program. I first estimate mortality differentials by gender, race, ethnicity and level of education using the National Longitudinal Mortality Study and document substantial differences. I then use these estimates to examine the expected transfers' that would take place between socioeconomic groups under different assumptions about the structure of an annuity program. Using an expected present discounted value or money's worth' calculation as the basis for comparison, I find that the size of transfers in an individual accounts program is highly sensitive to the benefit structure. For example, mandating a single-life, real annuity can result in expected transfers of as high as 20% of the account balance, often from economically disadvantaged groups toward groups that are better off. These transfers can be substantially reduced through the use of joint life annuities, survivor provisions and bequest options. For example, the largest expected negative transfer under a joint and full survivor annuity with a fully valued 20-year guarantee option is only 2% of the account balance. However, efforts to reduce the extent of redistribution generally do so at the cost of significantly lower annuity benefits paid to the individuals who contribute to the system.

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This chapter was published in:

  • Martin Feldstein & Jeffrey B. Liebman, 2002. "The Distributional Aspects of Social Security and Social Security Reform," NBER Books, National Bureau of Economic Research, Inc, number feld02-1, octubre-d.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 9756.

    Handle: RePEc:nbr:nberch:9756

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    1. Hurd, Michael D, 1989. "Mortality Risk and Bequests," Econometrica, Econometric Society, vol. 57(4), pages 779-813, July.
    2. 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. Hurd, Michael D, 1987. "Savings of the Elderly and Desired Bequests," American Economic Review, American Economic Association, vol. 77(3), pages 298-312, June.
    4. Zvi Bodie & James E. Pesando, 1983. "Retirement Annuity Design in an Inflationary Climate," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 291-324 National Bureau of Economic Research, Inc.
    5. Jeffrey R. Brown & Olivia S. Mitchell & James M. Poterba, 1999. "The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement Program," Center for Financial Institutions Working Papers 99-18, Wharton School Center for Financial Institutions, University of Pennsylvania.
    6. Jeffrey R. Brown, 1999. "Are the Elderly Really Over-Annuitized? New Evidence on Life Insurance and Bequests," NBER Working Papers 7193, National Bureau of Economic Research, Inc.
    7. Jeffrey B Liebman, 2002. "Redistribution in the Current U.S. Social Security System," Working Papers 02-09, Center for Economic Studies, U.S. Census Bureau.
    8. Samwick, Andrew A., 1999. "Social Security Reform in the United States," National Tax Journal, National Tax Association, vol. 52(n. 4), pages 819-42, December.
    9. Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, 1997. "New Evidence on the Money's Worth of Individual Annuities," NBER Working Papers 6002, National Bureau of Economic Research, Inc.
    10. Samuel Preston & Irma Elo & Ira Rosenwaike & Mark Hill, 1996. "African-american mortality at older ages: Results of a matching study," Demography, Springer, vol. 33(2), pages 193-209, May.
    11. Brown, Jeffrey R., 2001. "Private pensions, mortality risk, and the decision to annuitize," Journal of Public Economics, Elsevier, vol. 82(1), pages 29-62, October.
    12. Bernheim, B Douglas, 1991. "How Strong Are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 899-927, October.
    13. Martin Feldstein & Elena Ranguelova & Andrew Samwick, 1999. "The Transition to Investment-Based Social Security when Portfolio Returns and Capital Profitability are Uncertain," NBER Working Papers 7016, National Bureau of Economic Research, Inc.
    14. Orazio P. Attanasio & Hilary Williamson Hoynes, 2000. "Differential Mortality and Wealth Accumulation," Journal of Human Resources, University of Wisconsin Press, vol. 35(1), pages 1-29.
    15. Wilhelm, M.O., 1990. "Bequest Behavior And The Effect Of Heirs' Earnings: Testing The Altruistic Model Of Bequests," Papers 9-90-12, Pennsylvania State - Department of Economics.
    16. Laitner, John & Juster, F Thomas, 1996. "New Evidence on Altruism: A Study of TIAA-CREF Retirees," American Economic Review, American Economic Association, vol. 86(4), pages 893-908, September.
    17. Angus Deaton & Christina Paxson, 1999. "Mortality, education, income and inequality among American cohorts," Working Papers 279, Princeton University, Woodrow Wilson School of Public and International Affairs, Center for Health and Wellbeing..
    18. Amy Finkelstein & James Poterba, 1999. "Selection Effects in the Market for Individual Annuities: New Evidence from the United Kingdom," NBER Working Papers 7168, National Bureau of Economic Research, Inc.
    19. James P. Smith, 1999. "Healthy Bodies and Thick Wallets: The Dual Relation between Health and Economic Status," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 145-166, Spring.
    20. Panis, C.W.A. & Lillard, L.A., 1996. "Socioeconomic Differentials in the Returns to Social Security," Papers 96-05, RAND - Labor and Population Program.
    21. Laurence J. Kotlikoff & Jeffrey Sachs, 1998. "The personal security system: a framework for reforming Social Security," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 11-13.
    22. Garrett, Daniel M, 1995. "The Effects of Differential Mortality Rates on the Progressivity of Social Security," Economic Inquiry, Western Economic Association International, vol. 33(3), pages 457-75, July.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Las consecuencias económicas de la muerte
      by Josep Pijoan-Mas in Nada Es Gratis on 2010-10-12 16:53:19
    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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    Cited by:
    1. Jeffrey R. Brown, 2000. "How Should We Insure Longevity Risk In Pensions And Social Security?," Issues in Brief ib-4, Center for Retirement Research.
    2. Julia Lynn Coronado & Don Fullerton & Thomas Glass, 2000. "The Progressivity of Social Security," NBER Working Papers 7520, National Bureau of Economic Research, Inc.
    3. Shinichi Nishiyama & Kent Smetters, 2006. "Social Security Privatization with Income-Mortality Correlation," Working Papers wp140, University of Michigan, Michigan Retirement Research Center.
    4. Martin Feldstein & Elena Ranguelova, 2000. "Accumulated Pension Collars: A Market Approach to Reducing the Risk of Investment-Based Social Security Reform," NBER Working Papers 7861, National Bureau of Economic Research, Inc.
    5. Julia Lynn Coronado & Don Fullerton & Thomas Glass, 2002. "Long-Run Effects of Social Security Reform Proposals on Lifetime Progressivity," NBER Chapters, in: The Distributional Aspects of Social Security and Social Security Reform, pages 149-206 National Bureau of Economic Research, Inc.
    6. Jeffrey R. Brown, 2002. "Redistribution and Insurance: Mandatory Annuitization with Mortality Heterogeneity," NBER Working Papers 9256, National Bureau of Economic Research, Inc.
    7. Mazzaferro, Carlo & Morciano, Marcello & Savegnago, Marco, 2012. "Differential mortality and redistribution in the Italian notional defined contribution system," Journal of Pension Economics and Finance, Cambridge University Press, vol. 11(04), pages 500-530, October.
    8. James, Estelle & Vittas, Dimitri, 2000. "Annuity markets in comparative perspective : do consumers get their money's wotrth?," Policy Research Working Paper Series 2493, The World Bank.
    9. Jeffrey B Liebman, 2002. "Redistribution in the Current U.S. Social Security System," Working Papers 02-09, Center for Economic Studies, U.S. Census Bureau.
    10. Bovenberg, A.L. & Koijen, R.S.J. & Nijman, T.E. & Teulings, C.N., 2007. "Saving and investing over the life cycle and the role of collective pension funds," Open Access publications from Tilburg University urn:nbn:nl:ui:12-301942, Tilburg University.
    11. Adriaan Kalwij & Rob Alessie & Marike Knoef, 2013. "The Association Between Individual Income and Remaining Life Expectancy at the Age of 65 in the Netherlands," Demography, Springer, vol. 50(1), pages 181-206, February.
    12. Wei Sun & Anthony Webb, 2009. "How Much Do Households Really Lose By Claiming Social Security at Age 62?," Working Papers, Center for Retirement Research at Boston College wp2009-11, Center for Retirement Research, revised Apr 2009.
    13. Jeffrey R. Brown & Julia Lynn Coronado & Don Fullerton, 2009. "Is Social Security Part of the Social Safety Net?," NBER Working Papers 15070, National Bureau of Economic Research, Inc.
    14. Sven H. Sinclair & Kent A. Smetters, 2004. "Health Shocks and the Demand for Annuities: Technical Paper 2004-09," Working Papers 15868, Congressional Budget Office.
    15. John S. Greenlees & James E. Duggan & Robert Gillingham, 2007. "Mortality and Lifetime Income," IMF Working Papers 07/15, International Monetary Fund.

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