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Accounting for non-annuitization

  • Svetlana Pashchenko

Why don't people buy annuities? Several explanations have been provided by the previous literature: large fraction of preannuitized wealth in retirees' portfolios; adverse selection; bequest motives; and medical expense uncertainty. This paper uses a quantitative model to assess the importance of these impediments to annuitization and also studies three newer explanations: government safety net in terms of means-tested transfers; illiquidity of housing wealth; and restrictions on minimum amount of investment in annuities. This paper shows that quantitatively the last three explanations play a big role in reducing annuity demand. The minimum consumption floor turns out to be important to explain the lack of annuitization, especially for people in lower income quintiles, who are well insured by this provision. The minimum annuity purchase requirement involves big upfront investment and is binding for many, especially if housing wealth cannot be easily annuitized. Among the traditional explanations, preannuitized wealth has the largest quantitative contribution to the annuity puzzle.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-2010-03.

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Date of creation: 2010
Date of revision:
Handle: RePEc:fip:fedhwp:wp-2010-03
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  1. John Ameriks & Andrew Caplin & Steven Laufer & Stijn Van Nieuwerburgh, 2007. "The Joy of Giving or Assisted Living? Using Strategic Surveys to Separate Bequest and Precautionary Motives," NBER Working Papers 13105, National Bureau of Economic Research, Inc.
  2. Karsten Jeske & Sagiri Kitao, 2007. "U.S. tax policy and health insurance demand: can a regressive policy improve welfare?," FRB Atlanta Working Paper 2007-13, Federal Reserve Bank of Atlanta.
  3. Karen Kopecky & Tatyana Koreshkova, 2009. "The Impact of Medical and Nursing Home Expenses and Social Insurance Policies on Savings and Inequality," Working Papers 09006, Concordia University, Department of Economics.
  4. Martin S. Eichenbaum & Dan S. Peled, 1986. "Capital Accumulation and Annuities in an Adverse Selection Economy," NBER Working Papers 2046, National Bureau of Economic Research, Inc.
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  6. Eric French & John Bailey Jones, 2004. "On the distribution and dynamics of health care costs," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(6), pages 705-721.
  7. 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.
  8. Roozbeh Hosseini, 2008. "Adverse Selection in the Annuity Market and the Role for Social Security," 2008 Meeting Papers 264, Society for Economic Dynamics.
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  10. Jeffrey R. Brown & Olivia S. Mitchell & James M. Poterba, . "The Role of Real Annuities and Indexed Bonds In An Individual Accounts Retirement Program," Pension Research Council Working Papers 99-2, Wharton School Pension Research Council, University of Pennsylvania.
  11. Cassio M. Turra & Olivia S. Mitchell, 2004. "The Impact of Health Status and Out-of-Pocket Medical Expenditures on Annuity Valuation," Working Papers wp086, University of Michigan, Michigan Retirement Research Center.
  12. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the elderly save? the role of medical expenses," Working Paper Series WP-09-02, Federal Reserve Bank of Chicago.
  13. Mariacristina De Nardi & Eric French & John Bailey Jones, 2005. "Differential mortality, uncertain medical expenses, and the saving of elderly singles," Working Paper Series WP-05-13, Federal Reserve Bank of Chicago.
  14. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2004. "Are Americans Saving "Optimally" for Retirement?," NBER Working Papers 10260, National Bureau of Economic Research, Inc.
  15. Walliser, Jan, 2000. " Adverse Selection in the Annuities Market and the Impact of Privatizing Social Security," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 373-93, June.
  16. Dushi, Irena & Webb, Anthony, 2004. "Household annuitization decisions: simulations and empirical analyses," Journal of Pension Economics and Finance, Cambridge University Press, vol. 3(02), pages 109-143, July.
  17. John Ameriks & Andrew Caplin & Steven Laufer & Stijn Van Nieuwerburgh, 2011. "The Joy of Giving or Assisted Living? Using Strategic Surveys to Separate Public Care Aversion from Bequest Motives," Journal of Finance, American Finance Association, vol. 66(2), pages 519-561, 04.
  18. repec:tpr:qjecon:v:88:y:1974:i:1:p:44-62 is not listed on IDEAS
  19. Pang, Gaobo & Warshawsky, Mark, 2010. "Optimizing the equity-bond-annuity portfolio in retirement: The impact of uncertain health expenses," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 198-209, February.
  20. Mariacristina deNardi, 2000. "Wealth Inequality and Intergenerational Links," Econometric Society World Congress 2000 Contributed Papers 0547, Econometric Society.
  21. Karen A. Kopecky & Tatyana Koreshkova, 2010. "The impact of medical and nursing home expenses and social insurance," FRB Atlanta Working Paper 2010-19, Federal Reserve Bank of Atlanta.
  22. Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, 1997. "New Evidence on the Money's Worth of Individual Annuities," NBER Working Papers 6002, National Bureau of Economic Research, Inc.
  23. Lee Lockwood, 2012. "Bequest Motives and the Annuity Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 226-243, April.
  24. Jeffrey R. Brown & Mark J. Warshawsky, 2001. "Longevity-Insured Retirement Distributions from Pension Plans: Market and Regulatory Issues," NBER Working Papers 8064, National Bureau of Economic Research, Inc.
  25. Jeffrey R. Brown & James M. Poterba, 1999. "Joint Life Annuities and Annuity Demand by Married Couples," NBER Working Papers 7199, National Bureau of Economic Research, Inc.
  26. Lina Walker, 2004. "Elderly Households and Housing Wealth: Do They Use It or Lose It?," Working Papers wp070, University of Michigan, Michigan Retirement Research Center.
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