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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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:
Contact details of provider:
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)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Song, Jae G. & Manchester, Joyce, 2007. "New evidence on earnings and benefit claims following changes in the retirement earnings test in 2000," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 669-700, April.
- Coile, Courtney & Diamond, Peter & Gruber, Jonathan & Jousten, Alain, 2002.
"Delays in claiming social security benefits,"
Journal of Public Economics,
Elsevier, vol. 84(3), pages 357-385, June.
- COILE, Courtney & DIAMOND, Peter & GRUBER, Jonathan & JOUSTEN, Alain, 2000. "Delays in claiming social security benefits," CORE Discussion Papers 2000029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Courtney Coile & Peter Diamond & Jonathan Gruber & Alain Jousten, 1999. "Delays in Claiming Social Security Benefits," NBER Working Papers 7318, National Bureau of Economic Research, Inc.
- Jeffrey R. Brown, 2002.
"Redistribution and Insurance: Mandatory Annuitization with Mortality Heterogeneity,"
NBER Working Papers
9256, National Bureau of Economic Research, Inc.
- Jeffrey R. Brown, 2003. "Redistribution and Insurance: Mandatory Annuitization With Mortality Heterogeneity," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(1), pages 17-41.
- Michael D. Hurd & James P. Smith & Julie M. Zissimopoulos, 2002.
"The Effects of Subjective Survival on Retirement and Social Security Claiming,"
NBER Working Papers
9140, National Bureau of Economic Research, Inc.
- 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., vol. 19(6), pages 761-775.
- Michael Hurd & James P. Smith & Julie M. Zissimopoulos, 2003. "The Effects of Subjective Survival on Retirements and Social Security Claiming," Working Papers 03-11, RAND Corporation Publications Department.
- Michael D. Hurd & James P. Smith & Julie M. Zissimopoulos, 2002. "The Effects of Subjective Survival on Retirement and Social Security Claiming," Working Papers wp021, University of Michigan, Michigan Retirement Research Center.
- Jamshidian, Farshid, 1989. " An Exact Bond Option Formula," Journal of Finance, American Finance Association, vol. 44(1), pages 205-09, March.
- Olivia S. Mitchell, 1999.
"New Evidence on the Money's Worth of Individual Annuities,"
American Economic Review,
American Economic Association, vol. 89(5), pages 1299-1318, December.
- Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, 2000. "New Evidence on the Money's Worth of Individual Annuities," NBER Working Papers 6002, National Bureau of Economic Research, Inc.
- Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, . "New Evidence on the Money's Worth of Individual Annuities," Pension Research Council Working Papers 97-9, Wharton School Pension Research Council, University of Pennsylvania.
- Wolfram J. Horneff & Raimond H. Maurer & Michael Z. Stamos, 2008. "Optimal Gradual Annuitization: Quantifying the Costs of Switching to Annuities," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(4), pages 1019-1038.
- Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
- Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
- James E. Duggan & Christopher J. Soares, 2002. "Actuarial Nonequivalence in Early and Delayed Social Security Benefit Claims," Public Finance Review, , vol. 30(3), pages 188-207, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Broekman).
If references are entirely missing, you can add them using this form.