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Can the longevity risk alleviate The annuitization puzzle? Empirical evidence from Dutch data

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  • Federica Teppa

    ()
    (De Nederlandsche Bank (DNB) and Netspar)

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    Abstract

    This paper provides new evidence on individual preferences over annuities and lump sum payments based on hypothetical questions posed in the DNB Household Survey in 2005. Contrary to the majority of papers in the annuitization puzzle literature, this study allows to control explicitly for the subjective survival probability (SSP), a key driver of the decision about whether to annuitize or not as a perceived measure of longevity risk. We find that people expecting to live longer do claim to prefer the annuity. This finding is very robust to controlling for bequest motives. The relevance of this paper is twofold. First, it delivers an important empirical result on the role of the SSP that is still not directly tested in the literature. Second and more important, combined with the empirical evidence that on average individuals tend to systematically underestimate their life expectancy, the findings have strong policy implications. The annuitization puzzle may be alleviated by helping individuals in better assessng their longevity risk, rather than forcing their actions.

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    File URL: http://www.ecineq.org/milano/WP/ECINEQ2011-223.pdf
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    Bibliographic Info

    Paper provided by ECINEQ, Society for the Study of Economic Inequality in its series Working Papers with number 223.

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    Length: 34 pages
    Date of creation: 2011
    Date of revision:
    Handle: RePEc:inq:inqwps:ecineq2011-223

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    Web page: http://www.ecineq.org
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    Keywords: Longevity Risk; Annuitization Puzzle; Survey Data; Hypothetical Choices;

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    1. Carlos Vidal-Meliá & Ana Lejárraga-García, . "Demand for life annuities from married couples with a bequest motive," Working Papers 2005-11, FEDEA.
    2. Edmund Cannon & Ian Tonks, 2004. "U.K. Annuity Rates, Money's Worth and Pension Replacement Ratios 1957-2002," The Geneva Papers on Risk and Insurance, The International Association for the Study of Insurance Economics, The International Association for the Study of Insurance Economics, vol. 29(3), pages 371-393, 07.
    3. Benjamin M. Friedman & Mark Warshawsky, 1985. "The Cost of Annuities: Implications for Saving Behavior and Bequests," NBER Working Papers 1682, National Bureau of Economic Research, Inc.
    4. Butler, Monika & Teppa, Federica, 2007. "The choice between an annuity and a lump sum: Results from Swiss pension funds," Journal of Public Economics, Elsevier, Elsevier, vol. 91(10), pages 1944-1966, November.
    5. Vidal-Meli , Carlos & Lej Rraga-Garc A, Ana, 2006. "Demand for life annuities from married couples with a bequest motive," Journal of Pension Economics and Finance, Cambridge University Press, Cambridge University Press, vol. 5(02), pages 197-229, July.
    6. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the elderly save? the role of medical expenses," Working Paper Series, Federal Reserve Bank of Chicago WP-09-02, Federal Reserve Bank of Chicago.
    7. Owen O'Donnell & Federica Teppa & Eddy van Doorslaer, 2008. "Can subjective survival expectations explain retirement behaviour?," DNB Working Papers, Netherlands Central Bank, Research Department 188, Netherlands Central Bank, Research Department.
    8. Mullainathan, Sendhil & Brown, Jeffrey R. & Kling, Jeffrey R. & Wrobel, Marian Vaillant, 2008. "Why Don't People Insure Late Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle," Scholarly Articles 2799056, Harvard University Department of Economics.
    9. Carlos Vidal-Melia & Ana Lejárraga-García, 2004. "Demand For Life Annuities From Married Couples With A Bequest Motive," Public Economics, EconWPA 0409009, EconWPA.
    10. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2003. "Annuities and Individual Welfare," NBER Working Papers 9714, National Bureau of Economic Research, Inc.
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