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Refundable Annuities (Annuity Options)

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  • EYTAN SHESHINSKI

Abstract

Individuals can insure themselves perfectly against uncertainty about the length of life by purchasing deferred annuities early in life. In the absence of other uninsurable uncertainties (e.g., income), there will be no residual purchases or sales of annuities later in life, thereby avoiding any adverse‐selection. In contrast, the presence of such uncertainties creates an active residual annuity market based on the arrival of new information. We characterize the equilibrium in the residual annuity market and propose a new financial instrument, refundable annuities with a guaranteed refund price, which enables individuals who hold a portfolio of such annuities to better adjust their optimum consumption plan to different realizations. Refundable annuities are shown to be equivalent to annuity options, that is, options that, if exercised, enable the purchase of annuities later in life at a predetermined price. Holding a variety of refundable annuities is (ex ante) welfare enhancing.

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  • Eytan Sheshinski, 2010. "Refundable Annuities (Annuity Options)," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(1), pages 7-21, February.
    • Handle: RePEc:bla:jpbect:v:12:y:2010:i:1:p:7-21
    DOI: 10.1111/j.1467-9779.2009.01444.x
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    1. Brown, Jeffrey R. & Mitchell, Olivia S. & Poterba, James M. & Warshawsky, Mark J., 2001. "The Role of Annuity Markets in Financing Retirement," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262529130, December.
    2. Richard H. Thaler & Shlomo Benartzi, 2004. "Save More Tomorrow (TM): Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages 164-187, February.
    3. Eytan Sheshinski, 2007. "The Economic Theory of Annuities," Economics Books, Princeton University Press, edition 1, volume 1, number 8536.
    4. Brugiavini, Agar, 1993. "Uncertainty resolution and the timing of annuity purchases," Journal of Public Economics, Elsevier, vol. 50(1), pages 31-62, January.
    5. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 443-478.
    6. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
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    1. d’Albis, Hippolyte & Kalk, Andrei, 2021. "Why do we postpone annuity purchases?," Journal of Mathematical Economics, Elsevier, vol. 95(C).
    2. Sutcliffe, Charles, 2015. "Trading death: The implications of annuity replication for the annuity puzzle, arbitrage, speculation and portfolios," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 163-174.
    3. Norma L. Nielson, 2012. "Annuities and Your Nest Egg: Reforms to Promote Optimal Annuitization of Retirement Capital," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 358, August.
    4. Milevsky, Moshe A. & Salisbury, Thomas S., 2022. "Refundable income annuities: Feasibility of money-back guarantees," Insurance: Mathematics and Economics, Elsevier, vol. 105(C), pages 175-193.
    5. Silvia Platoni, 2010. "Asymmetric Information and Annuities," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(3), pages 501-532, June.

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