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Annuity markets in comparative perspective : do consumers get their money's wotrth?

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  • James, Estelle
  • Vittas, Dimitri

Abstract

Pension reforms normally focus on the accumulation phase, plus term insurance that provides bnefits for the disabled and for dependent survivors, all of which are immediate concerns. Decumulation of the capital in workers'retirement savings accounts appears to be far in the future. But in the second generation of reforms, countries have begun paying attention to eventual decumulation--either through gradual withdrawals or through annuitization, which provides longevity insurance. At this point, it becomes important to learn whether annuity markets exist and how they operate. The authors summarize preliminary results of a continuing research project that analyzes annuity markets in Australia, Canada, Chile, Israel, Singapore, Switzerland, and the United Kingdom. They focus on understanding whether annuity markets can be relied upon to provide reliable retirement income at reasonable prices. One way to approach this question is to explore whether the expected payouts and the"money's-worth ratio"differ across countries, and if so, why, and what light can be thrown on the existence and amount of adverse selection. Annuity markets are poorly designed for various reasons: worker myopia, precautionary and bequest saving (not erved by most annuity products), distrust of insurance companies (and unwillingness to turn sizeable savings over to them), adverse selection, and the crowding-out effect of social security (Which automatically annuitizes the largest share of people's retirement wealth). Preliminary findings suggest that the cost of annuities is lower than might be expected. When the risk-free discount rate is used, the money's-worth ratios of nominal annuities based on annuitant mortality tables exceed 90 percent--neither the industry"take"nor the effects of adverse selection appear to be as large as anticipated. But real annuities (in Chile, Israel, and the United Kingdom) have money's-worth ratios 7 to 9 percent lower than those of nominal annuities. And when the"riskier"corporate bond rate is used for discounting purposes, there is a further 7 percent reduction. The main policy issues include public versus private provision, the role of insurance companies in term and risk intermediation, the level of compulsory annuitization, and the need for robust regulation of annuity providers.

Suggested Citation

  • James, Estelle & Vittas, Dimitri, 2000. "Annuity markets in comparative perspective : do consumers get their money's wotrth?," Policy Research Working Paper Series 2493, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2493
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    References listed on IDEAS

    as
    1. Olivia S. Mitchell, 1999. "New Evidence on the Money's Worth of Individual Annuities," American Economic Review, American Economic Association, vol. 89(5), pages 1299-1318, December.
    2. Valdes-Prieto, Salvador, 1998. "Risks in pensions and annuities : efficient designs," Social Protection and Labor Policy and Technical Notes 20847, The World Bank.
    3. James M. Poterba & Mark Warshawsky, 2000. "The Costs of Annuitizing Retirement Payouts from Individual Accounts," NBER Chapters,in: Administrative Aspects of Investment-Based Social Security Reform, pages 173-206 National Bureau of Economic Research, Inc.
    4. Jeffrey R. Brown & Olivia S. Mitchell & James M. Poterba, 2001. "The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement Program," NBER Chapters,in: Risk Aspects of Investment-Based Social Security Reform, pages 321-370 National Bureau of Economic Research, Inc.
    5. David Blake, 1999. "Annuity Markets: Problems and Solutions," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 24(3), pages 358-375, July.
    6. Jeffrey Brown, 2002. "Differential Mortality and the Value of Individual Account Retirement Annuities," NBER Chapters,in: The Distributional Aspects of Social Security and Social Security Reform, pages 401-446 National Bureau of Economic Research, Inc.
    7. Salvador Valdés & Gonzalo Edwards, "undated". "Jubilación en los Sistemas Pensionales Privados," Documentos de Trabajo 182, Instituto de Economia. Pontificia Universidad Católica de Chile..
    8. 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.
    9. Benjamin M. Friedman & Mark J. Warshawsky, 1990. "The Cost of Annuities: Implications for Saving Behavior and Bequests," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 135-154.
    10. Vittas, Dimitri & Skully, Michael, 1991. "Overview of contractual savings institutions," Policy Research Working Paper Series 605, The World Bank.
    11. Benjamin M. Friedman & Mark Warshawsky, 1985. "The Cost of Annuities: Implications for Saving Behavior and Bequests," NBER Working Papers 1682, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Sutcliffe, Charles, 2015. "Trading death: The implications of annuity replication for the annuity puzzle, arbitrage, speculation and portfolios," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 163-174.
    2. Cecilia Dassatti & Rodrigo Lluberas, 2016. "The costs of annuitizing," Documentos de trabajo 2016004, Banco Central del Uruguay.

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