Demand for life annuities from married couples with a bequest motive

This paper will try to explain the “annuities puzzle” in greater depth by introducing the bequest motive, both strategic and altruistic. It will try to determine whether this motive really is a relevant feature influencing the demand for lifetime annuities from married couples. With this aim in mind, we develop an optimization model of the utility provided by purchasing a lifetime annuity with contingent survivor benefit or a joint survivor life annuity. Our model is based on that first put forward by Brown & Poterba (2000), to which we add elements from other models such as Friedman and Warshawsky’s (1990) and Vidal & Lejárraga's (2004) which include the bequest motive. This enables us to calculate equivalent wealth in various contexts: the possibility of access to actuarially fair annuity markets, the inclusion of so-called market imperfections, and the assumption that couples already have part of their wealth in pre-existing lifetime annuities. Numerical results are presented for the case of Spain. The bequest motive is found not to be a significant factor influencing the demand for annuities from couples. Indeed very few couples would be willing to purchase them once we take into account the combined effects of market imperfections, the possibility of pre-existing annuities and the bequest motive. These findings have repercussions for policy-makers regulating defined contribution capitalization systems which are complementary to defined benefit systems.