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Differential Mortality and the Value of Individual Account Retirement Annuities

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  • Jeffrey R. Brown

Abstract

This paper examines the extent of redistribution that would occur under various annuity and bequest options as part of an individual accounts retirement program. I first estimate mortality differentials by gender, race, ethnicity and level of education using the National Longitudinal Mortality Study and document substantial differences. I then use these estimates to examine the expected transfers' that would take place between socioeconomic groups under different assumptions about the structure of an annuity program. Using an expected present discounted value or money's worth' calculation as the basis for comparison, I find that the size of transfers in an individual accounts program is highly sensitive to the benefit structure. For example, mandating a single-life, real annuity can result in expected transfers of as high as 20% of the account balance, often from economically disadvantaged groups toward groups that are better off. These transfers can be substantially reduced through the use of joint life annuities, survivor provisions and bequest options. For example, the largest expected negative transfer under a joint and full survivor annuity with a fully valued 20-year guarantee option is only 2% of the account balance. However, efforts to reduce the extent of redistribution generally do so at the cost of significantly lower annuity benefits paid to the individuals who contribute to the system.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7560.

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Date of creation: Feb 2000
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Publication status: published as Differential Mortality and the Value of Individual Account Retirement Annuities , Jeffrey Brown. in The Distributional Aspects of Social Security and Social Security Reform , Feldstein and Liebman. 2002
Handle: RePEc:nbr:nberwo:7560

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  1. Brown, Jeffrey R., 2001. "Private pensions, mortality risk, and the decision to annuitize," Journal of Public Economics, Elsevier, vol. 82(1), pages 29-62, October.
  2. John Laitner & F. Thomas Juster, 1993. "New evidence on altruism: a study of TIAA-CREF retirees," Discussion Paper / Institute for Empirical Macroeconomics 86, Federal Reserve Bank of Minneapolis.
  3. Jeffrey R. Brown & Olivia S. Mitchell & James M. Poterba, 1999. "The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement Program," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 99-18, Wharton School Center for Financial Institutions, University of Pennsylvania.
  4. 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.
  5. Garrett, Daniel M, 1995. "The Effects of Differential Mortality Rates on the Progressivity of Social Security," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 33(3), pages 457-75, July.
  6. James P. Smith, 1999. "Healthy Bodies and Thick Wallets: The Dual Relation between Health and Economic Status," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 145-166, Spring.
  7. Jeffrey Brown, 2001. "Are the Elderly Really Over-Annuitized? New Evidence on Life Insurance and Bequests," NBER Chapters, in: Themes in the Economics of Aging, pages 91-126 National Bureau of Economic Research, Inc.
  8. Jeffrey B Liebman, 2002. "Redistribution in the Current U.S. Social Security System," Working Papers 02-09, Center for Economic Studies, U.S. Census Bureau.
  9. Samwick, Andrew A., 1999. "Social Security Reform in the United States," National Tax Journal, National Tax Association, vol. 52(n. 4), pages 819-42, December.
  10. Angus S. Deaton & Christina Paxson, 2001. "Mortality, Education, Income, and Inequality among American Cohorts," NBER Chapters, in: Themes in the Economics of Aging, pages 129-170 National Bureau of Economic Research, Inc.
  11. Bernheim, B Douglas, 1991. "How Strong Are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(5), pages 899-927, October.
  12. Orazio P. Attanasio & Hilary Williamson Hoynes, 2000. "Differential Mortality and Wealth Accumulation," Journal of Human Resources, University of Wisconsin Press, vol. 35(1), pages 1-29.
  13. Wilhelm, Mark O, 1996. "Bequest Behavior and the Effect of Heirs' Earnings: Testing the Altruistic Model of Bequests," American Economic Review, American Economic Association, vol. 86(4), pages 874-92, September.
  14. Zvi Bodie & James E. Pesando, 1983. "Retirement Annuity Design in an Inflationary Climate," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 291-324 National Bureau of Economic Research, Inc.
  15. Panis, C.W.A. & Lillard, L.A., 1996. "Socioeconomic Differentials in the Returns to Social Security," Papers, RAND - Labor and Population Program 96-05, RAND - Labor and Population Program.
  16. Laurence J. Kotlikoff & Jeffrey Sachs, 1998. "The personal security system: a framework for reforming Social Security," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 11-13.
  17. Amy Finkelstein & James Poterba, 1999. "Selection Effects in the Market for Individual Annuities: New Evidence from the United Kingdom," NBER Working Papers 7168, National Bureau of Economic Research, Inc.
  18. Martin Feldstein & Elena Ranguelova & Andrew Samwick, 2001. "The Transition to Investment-Based Social Security When Portfolio Returns and Capital Profitability Are Uncertain," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 41-90 National Bureau of Economic Research, Inc.
  19. Hurd, Michael D, 1987. "Savings of the Elderly and Desired Bequests," American Economic Review, American Economic Association, vol. 77(3), pages 298-312, June.
  20. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  21. Hurd, Michael D, 1989. "Mortality Risk and Bequests," Econometrica, Econometric Society, Econometric Society, vol. 57(4), pages 779-813, July.
  22. Samuel Preston & Irma Elo & Ira Rosenwaike & Mark Hill, 1996. "African-american mortality at older ages: Results of a matching study," Demography, Springer, Springer, vol. 33(2), pages 193-209, May.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Las consecuencias económicas de la muerte
    by Josep Pijoan-Mas in Nada Es Gratis on 2010-10-12 16:53:19
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Cited by:
  1. Jeffrey R. Brown, 2000. "How Should We Insure Longevity Risk In Pensions And Social Security?," Issues in Brief ib-4, Center for Retirement Research.
  2. Julia Lynn Coronado & Don Fullerton & Thomas Glass, 2000. "Long Run Effects of Social Security Reform Proposals on Lifetime Progressivity," NBER Working Papers 7568, National Bureau of Economic Research, Inc.
  3. 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.
  4. Jeffrey B Liebman, 2002. "Redistribution in the Current U.S. Social Security System," Working Papers 02-09, Center for Economic Studies, U.S. Census Bureau.
  5. Adriaan Kalwij & Rob Alessie & Marike Knoef, 2013. "The Association Between Individual Income and Remaining Life Expectancy at the Age of 65 in the Netherlands," Demography, Springer, Springer, vol. 50(1), pages 181-206, February.
  6. Martin Feldstein & Elena Ranguelova, 2001. "Accumulated Pension Collars: A Market Approach to Reducing the Risk of Investment-Based Social Security Reform," NBER Chapters, in: Tax Policy and the Economy, Volume 15, pages 149-166 National Bureau of Economic Research, Inc.
  7. Jeffrey R. Brown & Julia Lynn Coronado & Don Fullerton, 2009. "Is Social Security Part of the Social Safety Net?," NBER Chapters, in: Tax Policy and the Economy, Volume 23, pages 37-72 National Bureau of Economic Research, Inc.
  8. Shinichi Nishiyama & Kent Smetters, 2006. "Social Security Privatization with Income-Mortality Correlation," Working Papers, University of Michigan, Michigan Retirement Research Center wp140, University of Michigan, Michigan Retirement Research Center.
  9. Mazzaferro, Carlo & Morciano, Marcello & Savegnago, Marco, 2012. "Differential mortality and redistribution in the Italian notional defined contribution system," Journal of Pension Economics and Finance, Cambridge University Press, Cambridge University Press, vol. 11(04), pages 500-530, October.
  10. Sven H. Sinclair & Kent A. Smetters, 2004. "Health Shocks and the Demand for Annuities: Technical Paper 2004-09," Working Papers, Congressional Budget Office 15868, Congressional Budget Office.
  11. John S. Greenlees & James E. Duggan & Robert Gillingham, 2007. "Mortality and Lifetime Income," IMF Working Papers 07/15, International Monetary Fund.
  12. James, Estelle & Vittas, Dimitri, 2000. "Annuity markets in comparative perspective : do consumers get their money's wotrth?," Policy Research Working Paper Series 2493, The World Bank.
  13. Bovenberg, A.L. & Koijen, R.S.J. & Nijman, T.E. & Teulings, C.N., 2007. "Saving and investing over the life cycle and the role of collective pension funds," Open Access publications from Tilburg University urn:nbn:nl:ui:12-301942, Tilburg University.
  14. 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.
  15. Julia Lynn Coronado & Don Fullerton & Thomas Glass, 2000. "The Progressivity of Social Security," NBER Working Papers 7520, National Bureau of Economic Research, Inc.

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