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Differential Mortality and the Value of Individual Account Retirement Annuities

  • Jeffrey R. Brown

This paper examines the extent of redistribution that would occur under various annuity and bequest options as part of an individual accounts retirement program. I first estimate mortality differentials by gender, race, ethnicity and level of education using the National Longitudinal Mortality Study and document substantial differences. I then use these estimates to examine the expected transfers' that would take place between socioeconomic groups under different assumptions about the structure of an annuity program. Using an expected present discounted value or money's worth' calculation as the basis for comparison, I find that the size of transfers in an individual accounts program is highly sensitive to the benefit structure. For example, mandating a single-life, real annuity can result in expected transfers of as high as 20% of the account balance, often from economically disadvantaged groups toward groups that are better off. These transfers can be substantially reduced through the use of joint life annuities, survivor provisions and bequest options. For example, the largest expected negative transfer under a joint and full survivor annuity with a fully valued 20-year guarantee option is only 2% of the account balance. However, efforts to reduce the extent of redistribution generally do so at the cost of significantly lower annuity benefits paid to the individuals who contribute to the system.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7560.

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Date of creation: Feb 2000
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Publication status: published as Differential Mortality and the Value of Individual Account Retirement Annuities , Jeffrey Brown. in The Distributional Aspects of Social Security and Social Security Reform , Feldstein and Liebman. 2002
Handle: RePEc:nbr:nberwo:7560
Note: AG PE
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  1. Orazio P. Attanasio & Hilary W. Hoynes, 1995. "Differential Mortality and Wealth Accumulation," NBER Working Papers 5126, National Bureau of Economic Research, Inc.
  2. Laurence J. Kotlikoff & Jeffrey Sachs, 1998. "The personal security system: a framework for reforming Social Security," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 11-13.
  3. James P. Smith, 1999. "Healthy Bodies and Thick Wallets: The Dual Relation between Health and Economic Status," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 145-166, Spring.
  4. Martin Feldstein & Elena Ranguelova & Andrew Samwick, 1999. "The Transition to Investment-Based Social Security when Portfolio Returns and Capital Profitability are Uncertain," NBER Working Papers 7016, National Bureau of Economic Research, Inc.
  5. Laitner, John & Juster, F Thomas, 1996. "New Evidence on Altruism: A Study of TIAA-CREF Retirees," American Economic Review, American Economic Association, vol. 86(4), pages 893-908, September.
  6. Jeffrey B. Liebman, 2001. "Redistribution in the Current U.S. Social Security System," NBER Working Papers 8625, National Bureau of Economic Research, Inc.
  7. Jeffrey R. Brown & Olivia S. Mitchell & James M. Poterba, 1999. "The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement Program," Center for Financial Institutions Working Papers 99-18, Wharton School Center for Financial Institutions, University of Pennsylvania.
  8. Martin Feldstein & Jeffrey B. Liebman, 2001. "Social Security," NBER Working Papers 8451, National Bureau of Economic Research, Inc.
    • Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
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  11. Hurd, Michael D, 1989. "Mortality Risk and Bequests," Econometrica, Econometric Society, vol. 57(4), pages 779-813, July.
  12. Angus Deaton & Christina Paxson, 1999. "Mortality, Education, Income, and Inequality among American Cohorts," NBER Working Papers 7140, National Bureau of Economic Research, Inc.
  13. Amy Finkelstein & James Poterba, 1999. "Selection Effects in the Market for Individual Annuities: New Evidence from the United Kingdom," NBER Working Papers 7168, National Bureau of Economic Research, Inc.
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  15. Samwick, Andrew A., 1999. "Social Security Reform in the United States," National Tax Journal, National Tax Association, vol. 52(n. 4), pages 819-42, December.
  16. Zvi Bodie & James E. Pesando, 1982. "Retirement Annuity Design in an Inflationary Climate," NBER Working Papers 0896, National Bureau of Economic Research, Inc.
  17. Wilhelm, M.O., 1990. "Bequest Behavior And The Effect Of Heirs' Earnings: Testing The Altruistic Model Of Bequests," Papers 9-90-12, Pennsylvania State - Department of Economics.
  18. Panis, C.W.A. & Lillard, L.A., 1996. "Socioeconomic Differentials in the Returns to Social Security," Papers 96-05, RAND - Labor and Population Program.
  19. Bernheim, B Douglas, 1991. "How Strong Are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 899-927, October.
  20. Jeffrey Brown, 2001. "Are the Elderly Really Over-Annuitized? New Evidence on Life Insurance and Bequests," NBER Chapters, in: Themes in the Economics of Aging, pages 91-126 National Bureau of Economic Research, Inc.
  21. 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.
  22. Samuel Preston & Irma Elo & Ira Rosenwaike & Mark Hill, 1996. "African-american mortality at older ages: Results of a matching study," Demography, Springer, vol. 33(2), pages 193-209, May.
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