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The Macroeconomic Effects of Longevity Risk under Private and Public Insurance and Asymmetric Information

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  • Ben J. Heijdra
  • Yang Jiang
  • Jochen O. Mierau

Abstract

We study the impact of a fully-funded social security system in an economy with heterogeneous consumers. The unobservability of individual health conditions leads to adverse selection in the private annuity market. Introducing social security—which is immune to adverse selection—affects capital accumulation and individual welfare depending on its size and on the pension benefit rule that is adopted. If this rule incorporates some implicit or explicit redistribution from healthy to unhealthy individuals then the latter types are better off as a result of the pension system. In the absence of redistribution the public pension system makes everybody worse off in the long run. Though attractive to distant generations, privatization of social security is not generally Pareto improving to all generations.

Suggested Citation

  • Ben J. Heijdra & Yang Jiang & Jochen O. Mierau, 2017. "The Macroeconomic Effects of Longevity Risk under Private and Public Insurance and Asymmetric Information," CESifo Working Paper Series 6767, CESifo.
    • Handle: RePEc:ces:ceswps:_6767
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    References listed on IDEAS

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    1. Helmuth Cremer & Jean‐Marie Lozachmeur & Pierre Pestieau, 2010. "Collective Annuities and Redistribution," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(1), pages 23-41, February.
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    6. Ben Heijdra & Laurie Reijnders, 2012. "Adverse Selection in Private Annuity Markets and the Role of Mandatory Social Annuitization," De Economist, Springer, vol. 160(3), pages 311-337, September.
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    10. Bertrand Villeneuve, 2003. "Mandatory Pensions and the Intensity of Adverse Selection in Life Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(3), pages 527-548, September.
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    12. Oded Palmon & Avia Spivak, 2007. "Adverse selection and the market for annuities," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 32(1), pages 37-59, June.
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    Cited by:

    1. d’Albis, Hippolyte & Kalk, Andrei, 2021. "Why do we postpone annuity purchases?," Journal of Mathematical Economics, Elsevier, vol. 95(C).
    2. Ben J. Heijdra & Pim Heijnen, 2021. "Efficiency and Equity: A General Equilibrium Analysis of Rent-Seeking," CESifo Working Paper Series 9375, CESifo.
    3. Faris Alshubiri, 2021. "The stock market capitalisation and financial growth nexus: an empirical study of western European countries," Future Business Journal, Springer, vol. 7(1), pages 1-20, December.

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    More about this item

    Keywords

    social security; annuity market; adverse selection; overlapping generations; redistribution;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J10 - Labor and Demographic Economics - - Demographic Economics - - - General

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