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Longevity-Insured Retirement Distributions from Pension Plans: Market and Regulatory Issues

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  • Jeffrey R. Brown
  • Mark J. Warshawsky

Abstract

This paper explores the extent to which retirees can and do insure themselves against longevity risk in private pension plans. We first review the theoretical and empirical results on the value of annuities, and discuss reasons why households may choose not to further insure themselves against longevity risk. We then analyze current trends in the private pension market, and find that the shift from defined benefit plans to defined contribution plans is likely to reduce annuitization rates among future retirees. This is driven primarily by the fact that the majority of DC plans, such as 401(k) plans, do not even offer participants a life annuity option at retirement. Thus, individuals who wish to annuitize generally must do so in the individual market where payouts are lower due to a healthier mortality pool. Hence, we can forecast that in the coming decades, absent institutional and regulatory changes, overall annuitization rates may fall and households may be increasingly exposed to the risk of outliving their financial resources, while the currently small private individual annuity market may witness significant growth. Finally, we discuss several policy options designed to increase annuitization of retirement resources.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:8064
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    References listed on IDEAS

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    1. William G. Gale & Joel B. Slemrod, 2001. "Rethinking the Estate and Gift Tax: Overview," NBER Working Papers 8205, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Olivia S. Mitchell & David McCarthy, 2002. "Annuities for an Ageing World," CeRP Working Papers 21, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    2. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2005. "Annuities and Individual Welfare," American Economic Review, American Economic Association, vol. 95(5), pages 1573-1590, December.
    3. Bell, Adrian & Sutcliffe, Charles, 2010. "Valuing medieval annuities: Were corrodies underpriced?," Explorations in Economic History, Elsevier, vol. 47(2), pages 142-157, April.
    4. Blake, David & Cairns, Andrew J. G. & Dowd, Kevin, 2003. "Pensionmetrics 2: stochastic pension plan design during the distribution phase," Insurance: Mathematics and Economics, Elsevier, vol. 33(1), pages 29-47, August.
    5. Michael D. Hurd & James P. Smith & Julie M. Zissimopoulos, 2004. "The effects of subjective survival on retirement and Social Security claiming," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(6), pages 761-775.
    6. 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.
    7. Devis Geron, 2011. "Severance Pay or Pension Funds?," "Marco Fanno" Working Papers 0139, Dipartimento di Scienze Economiche "Marco Fanno".
    8. Jeffrey R. Brown & James M. Poterba, 2006. "Household Ownership of Variable Annuities," NBER Chapters,in: Tax Policy and the Economy, Volume 20, pages 163-191 National Bureau of Economic Research, Inc.
    9. Alexis Direr, 2010. "Flexible Life Annuities," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(1), pages 43-55, February.
    10. Olivia S. Mitchell, 2001. "Developments in Decumulation: The Role of Annuity Products in Financing Retirement," NBER Working Papers 8567, National Bureau of Economic Research, Inc.
    11. Leiser, David & Azar, Ofer H. & Hadar, Liat, 2008. "Psychological construal of economic behavior," Journal of Economic Psychology, Elsevier, vol. 29(5), pages 762-776, November.
    12. Jeff Dominitz & Angela Hung & Arthur vanSoest, 2007. "Future Beneficiary Expectations of the Returns to Delayed Social Security Benefit Claiming and Choice Behavior," Working Papers wp164, University of Michigan, Michigan Retirement Research Center.
    13. Milevsky, Moshe A. & Young, Virginia R., 2007. "Annuitization and asset allocation," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 3138-3177, September.
    14. Pashchenko, Svetlana, 2013. "Accounting for non-annuitization," Journal of Public Economics, Elsevier, vol. 98(C), pages 53-67.
    15. Bonnie-Jeanne MacDonald & Andrew J. G. Cairns, 2009. "Getting Feedback on Defined Contribution Pension Plans," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(2), pages 385-417.
    16. Michael D. Hurd & James P. Smith & Julie M. Zissimopoulos, 2004. "The effects of subjective survival on retirement and Social Security claiming," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(6), pages 761-775.
    17. Sven H. Sinclair & Kent A. Smetters, 2004. "Health Shocks and the Demand for Annuities: Technical Paper 2004-09," Working Papers 15868, Congressional Budget Office.
    18. Moshe A. Milevsky & Virginia R. Young, 2015. "Annuitization and asset allocation," Papers 1506.05990, arXiv.org.
    19. repec:eee:accfor:v:38:y:2014:i:1:p:18-37 is not listed on IDEAS
    20. Jeffrey R. Brown, 2007. "Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning," NBER Working Papers 13537, National Bureau of Economic Research, Inc.
    21. Andrew A. Samwick & Jonathan Skinner, 2004. "How Will 401(k) Pension Plans Affect Retirement Income?," American Economic Review, American Economic Association, vol. 94(1), pages 329-343, March.
    22. William G. Gale & Joel B. Slemrod, 2001. "Rethinking the Estate and Gift Tax: Overview," NBER Working Papers 8205, National Bureau of Economic Research, Inc.

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