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The Impact of Health Status and Out-of-Pocket Medical Expenditures on Annuity Valuation

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  • Cassio M. Turra

    (University of Pennsylvania)

  • Olivia S. Mitchell

    (University of Pennsylvania)

Abstract

This paper describes how differences in health status at retirement can influence the decision to purchase a life annuity. We extend previous research on annuitization decisions by incorporating the effect of health differentials via differences in survival throughout the latter portion of life. Next, we consider how precautionary savings motivated by uncertain out-of-pocket medical expenses influence annuitization decisions. Our results show that annuities become less attractive to people facing uncertain medical expenses. While full annuitization would still be optimal if annuity markets were truly complete and both life- and health-contingent, lacking this, annuity equivalent wealth values are much lower for those in poor health, as compared to persons in good health.

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File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp086.pdf
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Bibliographic Info

Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp086.

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Length: 29 pages
Date of creation: Jul 2004
Date of revision:
Handle: RePEc:mrr:papers:wp086

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References

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  1. Michael D. Hurd & Daniel McFadden & Angela Merrill, 2001. "Predictors of Mortality among the Elderly," NBER Chapters, in: Themes in the Economics of Aging, pages 171-198 National Bureau of Economic Research, Inc.
  2. Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers 3-95, Wharton School Rodney L. White Center for Financial Research.
  3. 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.
  4. Jeffrey R. Brown, 1999. "Are the Elderly Really Over-Annuitized? New Evidence on Life Insurance and Bequests," NBER Working Papers 7193, National Bureau of Economic Research, Inc.
  5. James F. Moore & Olivia S. Mitchell, . "Projected Retirement Wealth and Saving Adequacy," Pension Research Council Working Papers 98-1, Wharton School Pension Research Council, University of Pennsylvania.
  6. John F. Cogan & Olivia S. Mitchell, 2002. "The Role of Economic Policy in Social Security Reform: Perspectives from the President's Commission," NBER Working Papers 9166, National Bureau of Economic Research, Inc.
  7. David M. Cutler & Ellen Meara, 1999. "The Concentration of Medical Spending: An Update," NBER Working Papers 7279, National Bureau of Economic Research, Inc.
  8. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2003. "Annuities and Individual Welfare," NBER Working Papers 9714, National Bureau of Economic Research, Inc.
  9. Jeffrey R. Brown & Mark J. Warshawsky, 2001. "Longevity-Insured Retirement Distributions from Pension Plans: Market and Regulatory Issues," NBER Working Papers 8064, National Bureau of Economic Research, Inc.
  10. Olivia S. Mitchell & Michael Gordon & Marc M. Twinney, . "Assessing the Challenges to the Pension System," Pension Research Council Working Papers 95-1, Wharton School Pension Research Council, University of Pennsylvania.
  11. Palumbo, Michael G, 1999. "Uncertain Medical Expenses and Precautionary Saving Near the End of the Life Cycle," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 395-421, April.
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Cited by:
  1. Juan Esteban Halcartegaray & Jorge Miranda, 2011. "Efectos del SCOMP sobre la Elección individual de Modalidad de Pensión," Working Papers 52, Superintendencia de Pensiones, revised Aug 2012.
  2. Motohiro Yogo, 2009. "Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing and Risky Assets," Working Papers, Center for Retirement Research at Boston College wp2009-3, Center for Retirement Research, revised Jan 2009.
  3. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2003. "Annuities and Individual Welfare," NBER Working Papers 9714, National Bureau of Economic Research, Inc.
  4. Robert Gazzale & Julian Jamison & Alexander Karlan & Dean Karlan, 2013. "Ambiguous Solicitation: Ambiguous Prescription," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 1002-1011, 01.
  5. Giuseppe Cappelletti & Giovanni Guazzarotti & Pietro Tommasino, 2011. "What determines annuity demand at retirement?," Temi di discussione (Economic working papers) 805, Bank of Italy, Economic Research and International Relations Area.
  6. Svetlana Pashchenko, 2010. "Accounting for non-annuitization," 2010 Meeting Papers 563, Society for Economic Dynamics.
  7. Kam Ki Tang & Jie Zhang, 2007. "Morbidity, Mortality, Health Expenditures and Annuitization," CESifo Working Paper Series 2086, CESifo Group Munich.
  8. Davidoff, Thomas, 2010. "Home equity commitment and long-term care insurance demand," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 44-49, February.
  9. Jeffrey R. Brown, 2007. "Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning," NBER Working Papers 13537, National Bureau of Economic Research, Inc.
  10. James M. Poterba & Steven F. Venti & David A. Wise, 2011. "The Composition and Draw-down of Wealth in Retirement," NBER Working Papers 17536, National Bureau of Economic Research, Inc.
  11. Robert S. Gazzale & Lina Walker, 2009. "Behavioral Biases in Annuity Choice: An Experiment," Department of Economics Working Papers 2009-01, Department of Economics, Williams College.
  12. Gaobo Pang, Mark J. Warshawsk, . "Optimizing the Equity-Bond-Annuity Portfolio in Retirement: The Impact of Uncertain Health Expenses," Research Reports 4, Watson Wyatt Worldwide.
  13. Anthony Webb & Natalia Zhivan, 2010. "How Much Is Enough? The Distribution of Lifetime Health Care Costs," Working Papers, Center for Retirement Research at Boston College wp2010-1, Center for Retirement Research, revised Feb 2010.
  14. Blake, David & Boardman, Tom, 2010. "Spend more today: Using behavioural economics to improve retirement expenditure decisions," MPRA Paper 34234, University Library of Munich, Germany.
  15. Lee Lockwood, 2012. "Bequest Motives and the Annuity Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 226-243, April.
  16. Oded Palmon & Avia Spivak, 2007. "Adverse selection and the market for annuities," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 32(1), pages 37-59, June.

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