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 adjust the annual benefit level as a result. This adjustment is often not actuarially neutral with respect to the age at which benefits are claimed. The degree of actuarial nonequivalence varies by interest rates as well as individual characteristics such as gender and age. In this paper we show that actuarial nonequivalence can imply that deferring benefit claiming is suboptimal, irrespective of the preferences of the individual. Specifically, we derive preference-free conditions under which delaying benefit claiming is dominated by claiming benefits early, and using them to buy super-replicating annuity products from an insurance company. We find that the degree of actuarial nonequivalence in public pension schemes is such that such dominating strategies can exist even when the purchase of annuities would be significantly more costly than what is currently observed. If individuals choose to strategically exploit these dominating strategies, this will affect benefit claiming behavior, which in turn affects long run program costs.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2010-43.
Date of creation: 2010
Date of revision:
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Web page: http://center.uvt.nl
Pension Benefit Claiming; Delay Options; Actuarial Nonequivalence; Preference-free Dominance;
Other versions of this item:
- Sanders, Lisanne & De Waegenaere, Anja & Nijman, Theo E., 2013. "When can insurers offer products that dominate delayed old-age pension benefit claiming?," Insurance: Mathematics and Economics, Elsevier, vol. 53(1), pages 134-149.
- 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
This paper has been announced in the following NEP Reports:
- NEP-AGE-2010-05-02 (Economics of Ageing)
- NEP-ALL-2010-05-02 (All new papers)
- NEP-IAS-2010-05-02 (Insurance Economics)
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