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The Design of Pension Pay Out Options when the Health Status during Retirement is Uncertain

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  • Mathias Kifmann

Abstract

This paper examines the optimal design of pension plans when the health status during retirement is uncertain. Assuming that the health status affects both life expectancy and the marginal utility of consumption, choice between a lump-sum payment and an annuity can be welfare-enhancing if the health status is not observable by pension plans. This result holds if the marginal utility of consumption and life expectancy are negatively correlated. On equity grounds, a lump-sum option can be justified even if the marginal utility of consumption is independent of life expectancy.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2008/wp-cesifo-2008-02/cesifo1_wp2211.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2211.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2211

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Keywords: pensions; lump-sum withdrawal; annuities; longevity;

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  1. Brugiavini, Agar, 1993. "Uncertainty resolution and the timing of annuity purchases," Journal of Public Economics, Elsevier, Elsevier, vol. 50(1), pages 31-62, January.
  2. Michael D. Hurd & James P. Smith & Julie M. Zissimopoulos, 2004. "The effects of subjective survival on retirement and Social Security claiming," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 19(6), pages 761-775.
  3. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2003. "Annuities and Individual Welfare," NBER Working Papers 9714, National Bureau of Economic Research, Inc.
  4. Alexis Direr, 2010. "Flexible Life Annuities," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(1), pages 43-55, 02.
  5. Kotlikoff, Laurence J & Summers, Lawrence H, 1981. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(4), pages 706-32, August.
  6. Kathleen McGarry, 2004. "Health and Retirement: Do Changes in Health Affect Retirement Expectations?," Journal of Human Resources, University of Wisconsin Press, vol. 39(3).
  7. Evans, William N & Viscusi, W Kip, 1991. "Estimation of State-Dependent Utility Functions Using Survey Data," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 94-104, February.
  8. Kotlikoff, Laurence J & Spivak, Avia, 1981. "The Family as an Incomplete Annuities Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(2), pages 372-91, April.
  9. Olivia S. Mitchell, 1999. "New Evidence on the Money's Worth of Individual Annuities," American Economic Review, American Economic Association, American Economic Association, vol. 89(5), pages 1299-1318, December.
  10. B. Douglas Bernheim, 1992. "How Strong are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," NBER Working Papers 2942, National Bureau of Economic Research, Inc.
  11. Benjamin M. Friedman & Mark Warshawsky, 1985. "Annuity Prices and Saving Behavior in the United States," NBER Working Papers 1683, National Bureau of Economic Research, Inc.
  12. Jeffrey R. Brown & James M. Poterba, 1999. "Joint Life Annuities and Annuity Demand by Married Couples," NBER Working Papers 7199, National Bureau of Economic Research, Inc.
  13. Benjamin M. Friedman & Mark Warshawsky, 1988. "Annuity Prices and Saving Behavior in the United States," NBER Chapters, in: Pensions in the U.S. Economy, pages 53-84 National Bureau of Economic Research, Inc.
  14. Viscusi, W Kip & Evans, William N, 1990. "Utility Functions That Depend on Health Status: Estimates and Economic Implications," American Economic Review, American Economic Association, American Economic Association, vol. 80(3), pages 353-74, June.
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Cited by:
  1. Steinorth, Petra, 2012. "The demand for enhanced annuities," Journal of Public Economics, Elsevier, Elsevier, vol. 96(11), pages 973-980.

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