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The Tragedy of Annuitization

  • Ben J. Heijdra
  • Jochen O. Mierau
  • Laurie S. M. Reijnders

We construct a tractable discrete-time overlapping generations model of a closed economy and use it to study government redistribution of accidental bequests and private annuities in general equilibrium. Individuals face longevity risk as there is a positive probability of passing away before the retirement period. We find non-pathological cases where it is better for long-run welfare to waste accidental bequests than to give them to the elderly. Next we study the introduction of a perfectly competitive life insurance market offering actuarially fair annuities. There exists a tragedy of annuitization: although full annuitization of assets is privately optimal it is not socially beneficial due to adverse general equilibrium repercussions.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3141.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3141
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  1. Heijdra, Ben J. & Mierau, Jochen O. & Reijnders, Laurie S.M., 2011. "The Tragedy of Annuitization," Economics Series 268, Institute for Advanced Studies.
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