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Collective Annuities and Redistribution

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  • HELMUTH CREMER
  • JEAN-MARIE LOZACHMEUR
  • PIERRE PESTIEAU

Abstract

This paper studies the role of alternative pension systems that offer collective annuities. The defining characteristic of collective annuities is that they do not depend on an individual's survival probabilities. We show that such a system may be welfare improving (with a utilitarian social welfare function) even when private annuity markets are perfect and when life expectancy and earning abilities are positively correlated (i.e., in a setting that is a priori biased against collective annuities). We first concentrate on linear pension systems and contrast two schemes: a pure contributory (Bismarckian) pension and a flat rate (Beveridgean) pension. We show that the case for collective annuities is stronger when they are associated with a flat pension system. Then we analyze nonlinear pension schemes. We show that the solution can be implemented by a pension scheme associated with annuities that reflect some degree of "collectiveness." Unlike under pure collective annuities, benefits do depend on life expectancy but to a lesser degree than with actuarially fair private annuities. In other words, the impact of survival probabilities is mitigated rather than completely neutralized. Copyright © 2010 Wiley Periodicals, Inc..

Suggested Citation

  • Helmuth Cremer & Jean-Marie Lozachmeur & Pierre Pestieau, 2010. "Collective Annuities and Redistribution," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(1), pages 23-41, February.
  • Handle: RePEc:bla:jpbect:v:12:y:2010:i:1:p:23-41
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    References listed on IDEAS

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    1. Johann Brunner & Susanne Pech, 2008. "Optimum taxation of life annuities," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 30(2), pages 285-303, February.
    2. Cremer, Helmuth & Pestieau, Pierre & Rochet, Jean-Charles, 2001. "Direct versus Indirect Taxation: The Design of the Tax Structure Revisted," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 781-799, August.
    3. Coronado Julia Lynn & Fullerton Don & Glass Thomas, 2011. "The Progressivity of Social Security," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-45, November.
    4. Peter A. Diamond, 1967. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparison of Utility: Comment," Journal of Political Economy, University of Chicago Press, vol. 75, pages 765-765.
    5. Amy Finkelstein & James Poterba, 2004. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 183-208, February.
    6. Bommier, Antoine & Leroux, Marie-Louise & Lozachmeur, Jean-Marie, 2011. "On the public economics of annuities with differential mortality," Journal of Public Economics, Elsevier, vol. 95(7), pages 612-623.
    7. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2005. "Annuities and Individual Welfare," American Economic Review, American Economic Association, vol. 95(5), pages 1573-1590, December.
    8. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
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    Citations

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    Cited by:

    1. LEROUX, Marie-Louise & PESTIEAU, Pierre & PONTHIÈRE, Grégory, 2008. "Should we subsidize longevity?," CORE Discussion Papers 2008058, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Bommier, Antoine & Leroux, Marie-Louise & Lozachmeur, Jean-Marie, 2011. "On the public economics of annuities with differential mortality," Journal of Public Economics, Elsevier, vol. 95(7), pages 612-623.
    3. Ben J. Heijdra & Yang Jiang & Jochen O. Mierau, 2017. "The Macroeconomic Effects of Longevity Risk under Private and Public Insurance and Asymmetric Information," CESifo Working Paper Series 6767, CESifo Group Munich.
    4. Hippolyte d’Albis & Johanna Etner, 2013. "Illiquid Life Annuities," EconomiX Working Papers 2013-30, University of Paris Nanterre, EconomiX.
    5. Pierre Pestieau & Gregory Ponthiere, 2012. "The Public Economics of Increasing Longevity," Hacienda Pública Española, IEF, vol. 200(1), pages 41-74, March.
    6. Marie-Louise Leroux & Pierre Pestieau & Gregory Ponthiere, 2011. "Optimal linear taxation under endogenous longevity," Journal of Population Economics, Springer;European Society for Population Economics, vol. 24(1), pages 213-237, January.
    7. Pierre Pestieau & Grégory Ponthiere, 2012. "On the Policy Implications of Changing Longevity," CESifo Working Paper Series 3926, CESifo Group Munich.
    8. Yvonne Adema & Jan Bonenkamp & Lex Meijdam, 2016. "Flexible pension take-up in social security," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(2), pages 316-342, April.
    9. Leroux, M.-L. & Pestieau, P. & Ponthiere, G., 2011. "Longevity, genes and efforts: An optimal taxation approach to prevention," Journal of Health Economics, Elsevier, vol. 30(1), pages 62-76, January.
    10. Helmuth Cremer & Philippe Donder, 2016. "Life Expectancy Heterogeneity and the Political Support for Collective Annuities," Scandinavian Journal of Economics, Wiley Blackwell, vol. 118(3), pages 594-615, July.
    11. Pierre Pestieau & Grégory Ponthière, 2012. "The public economics of increasing longevity," Working Papers halshs-00676492, HAL.
    12. Marie-Louise Leroux & Pierre Pestieau & Grégory Ponthière, 2008. "Should we subsidize longevity?," Working Papers halshs-00586236, HAL.
    13. Yukihiro Nishimura & Pierre Pestieau, 2016. "Efficient taxation with differential risks of dependence and mortality," Economics Bulletin, AccessEcon, vol. 36(1), pages 52-57.

    More about this item

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy

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