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The Annuity Puzzle Revisited

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  • Hugo Benítez-Silva

    (SUNY at Stony Brook)

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    Abstract

    There is a pressing need for a better understanding of how access to various types of financial products can impact retirement behavior, especially if this access comes from a change in the incentive scheme through a reform of the current Social Security system. This is especially important if we are to provide useful policy recommendations regarding reform to the current social insurance system. In this paper I focus on the “annuity puzzle,” the question as to why the annuity market is so narrow. I present a model that endogenizes the annuity decision along with the consumption/saving and labor supply decisions. This research enhances our understanding of how annuities work in a life cycle model with more realistic characterizations of the choices and incentives that individuals face. My results show that the low rates of annuitization can be the product of optimal decision making by individuals in a life cycle model which endogenizes the labor/leisure decision and accounts for Social Security. The government should pay particular attention to the rules regarding withdrawal of benefits through annuities or lump-sums when introducing individual retirement accounts or other privatization schemes, given the interaction between retirement incentives and the attractiveness of annuities.

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    Bibliographic Info

    Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp055.

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    Length: 45 pages
    Date of creation: Jun 2003
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    Handle: RePEc:mrr:papers:wp055

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    Cited by:
    1. David A. Love, 2010. "The Effects of Marital Status and Children on Savings and Portfolio Choice," Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 385-432, January.
    2. Carlos Vidal-Melia & Ana Lejárraga-García, 2004. "The Bequest Motive And Single People’S Demand For Life Annuities," Public Economics 0405005, EconWPA.

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