Demand for life annuities from married couples with a bequest motive

2006 ◽  
Vol 5 (2) ◽  
pp. 197-229 ◽  
Author(s):  
CARLOS VIDAL-MELIÁ ◽  
ANA LEJÁRRAGA-GARCÍA
Keyword(s):  
Married Couples ◽  
Combined Effects ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Relevant Feature ◽  
Policy Makers ◽  
Life Annuity ◽  
Bequest Motive ◽  
Annuity Markets ◽  
Life Annuities

The aim of this paper is to explain the ‘annuities puzzle’ in greater depth by introducing the bequest motive. It will try to determine whether this motive really is a relevant feature influencing the demand for life annuities from married couples. With this aim in mind, we develop an optimization model of the utility provided by purchasing a life annuity with contingent survivor benefit or a joint survivor life annuity. Our model is based on that first put forward by Brown and Poterba (2000), to which we have added elements from other models, such as Friedman and Warshawsky's (1990) and Vidal and Lejárraga's (2004), which include the bequest motive. This will enable us to calculate the annuity equivalent wealth and the optimal percentage of wealth to annuitize 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 life 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.

scholarly journals Retirement Ages by Socio-Economic Class

Risks ◽  
2020 ◽  
Vol 8 (4) ◽  
pp. 102
Author(s):  
Séverine Arnold ◽  
Anca Jijiie
Keyword(s):  
Risk Aversion ◽  
Time Preference ◽  
Retirement Age ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Policy Makers ◽  
Economic Class ◽  
Notional Defined Contribution

We are interested in defining the optimal retirement age by socio-economic class, given a Defined Benefit and a Notional Defined Contribution scheme. We firstly implement a utilitarian framework. Depending on the risk aversion coefficients and individual time preference factors, the results differ significantly. Since this approach is individualistic, with no consensus in the existing literature on what values these parameters should take, it is not suitable to be used by policy makers. Therefore, we provide an alternative based on two accounts. We look for the retirement age allowing the accumulated value, at the last age with survivors, of the pensions received under each system, held in one account, to be close in value to the accumulated amount should the actuarially fair pension be paid, representing the second account. Our approach results in setting a lower retirement age for lower socio-economic classes and a higher retirement age for wealthier individuals.

scholarly journals Enhancing Retirement Security Through the Tax Code: The Efficacy of Tax-Based Subsidies in Life Annuity Markets

2009 ◽  
Vol 9 (2) ◽  
pp. 185-218 ◽  
Author(s):  
WILLIAM M. GENTRY ◽  
CASEY G. ROTHSCHILD
Keyword(s):  
Secular Trend ◽  
Tax Credits ◽  
Retirement Income ◽  
Monetary Incentives ◽  
Defined Contribution ◽  
Life Annuity ◽  
Retirement Security ◽  
Programming Techniques ◽  
Annuity Markets ◽  
The Government

AbstractThe under-development of existing annuity markets coupled with the secular trend away from traditional pensions towards defined contribution accounts in the U.S. raises significant concerns about the adequacy of retirement income for future retirees. We develop dynamic programming techniques to evaluate the efficacy of policies designed to address this concern by encouraging annuitization. Our analysis suggests that policies providing monetary incentives through the tax code can indeed significantly enhance annuitization among retirees: our central estimates suggest that tax-exemption based policies which have been recently proposed in Congress have the potential to increase annuitization by as much as $50,000 for each retired household, at a relatively modest revenue cost to the government. Similar sized policies based instead on refundable tax credits may be more desirable from both efficiency and distributional perspectives.

scholarly journals Life Annuitization: Why and how Much?

2006 ◽  
Vol 36 (2) ◽  
pp. 629-654 ◽  
Author(s):  
Donatien Hainaut ◽  
Pierre Devolder
Keyword(s):  
Asset Allocation ◽  
Risky Asset ◽  
Optimal Planning ◽  
Markov Chain Approximation ◽  
Investment Pattern ◽  
Life Annuity ◽  
Bequest Motive ◽  
Future Consumption ◽  
Life Annuities ◽  
Chain Approximation

This paper addresses some of the problems a majority of retired individuals face: Why and in what proportion should they invest in a life annuity to maximize the utility of their future consumption or a bequest? The market considered in this work is made up of three assets: a life annuity, a risky asset and a cash account. As this problem doesn’t accept any suitable explicit solution, it is numerically solved by the Markov Chain approximation developed by Kushner and Dupuis. Without a bequest motive, we observe that the optimal planning of consumption is divided into two periods and that optimal asset allocation should include the risky asset. Next, the influence of a bequest on consumption and investment pattern is developed. We demonstrate that even with a bequest motive, pensioners should allocate a part of their wealth to the purchase of life annuities.

A Comprehensive Review of the Evolution of Accounting Standards for State and Local Government Pensions and Other Postemployment Benefits in The United States

2019 ◽  
Vol 46 (1) ◽  
pp. 57-77
Author(s):  
Dale L. Flesher ◽  
Craig Foltin ◽  
Gary John Previts ◽  
Mary S. Stone
Keyword(s):  
United States ◽  
Local Government ◽  
Accounting Standards ◽  
The United States ◽  
Pension Funds ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Defined Contribution Plans ◽  
State And Local Government ◽  
State And Local

ABSTRACT Both the business media and the popular press have emphasized the underfunding problems associated with pension funds that are set aside for state and local government workers, a group that also includes teachers and professors at state-affiliated colleges and universities. The realization that pension funds are typically underfunded stems from the fact that the accounting standards associated with state and local government employee pension funds have led to greater transparency since 2011. This paper examines, explains, and interprets the historical development over the last 70 years of accounting standards for state and local government pension funds in the United States. Changing accounting standards, along with economic and social change, have led to consequences such as employers transforming their pension programs to avoid substantial costs and significant liabilities, for example by changing from defined benefit to defined contribution plans.

Transitions from career employment among public- and private-sector workers

2019 ◽  
Vol 18 (04) ◽  
pp. 529-548 ◽  
Author(s):  
Joseph F. Quinn ◽  
Kevin E. Cahill ◽  
Michael D. Giandrea
Keyword(s):  
Public Sector ◽  
Private Sector ◽  
Pension Plans ◽  
Full Time ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Private And Public ◽  
Public And Private Sector ◽  
Career Employment ◽  
Public Sector Workers

AbstractDo the retirement patterns of public-sector workers differ from those in the private sector? The latter typically face a retirement landscape with exposure to market uncertainties through defined-contribution pension plans and private saving. Public-sector workers, in contrast, are often covered by defined-benefit pension plans that encourage retirement at relatively young ages and offer financial security at older ages. We examine how private- and public-sector workers transition from full-time career employment, with a focus on the importance of gradual retirement. To our surprise, we find that the prevalence of continued work after career employment, predominantly on bridge jobs with new employers, is very similar in the two sectors, a result with important implications in a rapidly aging society.

scholarly journals Addressing Longevity Risk: How Best to Annuitize Defined Contribution Assets?

2020 ◽  
Vol 4 (Supplement_1) ◽  
pp. 686-686
Author(s):  
Alicia Munnell ◽  
Gal Wettstein ◽  
Wenliang Hou
Keyword(s):  
Social Security ◽  
Longevity Risk ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Economics Of Aging ◽  
Distribution Rules ◽  
Lifetime Income ◽  
The Social ◽  
Defined Benefit Pensions ◽  
Deferred Annuity

Abstract Unlike defined benefit pensions, 401(k) plans provide little guidance on how to turn accumulated assets into income. The key risk that retirees face is outliving their assets. Insurance against such risk is available through several routes, including immediate annuities, deferred annuities, and additional Social Security through delayed claiming. Under this Social Security bridge option, participants would tap their 401(k) for payments equal to their Social Security to delay claiming. This paper compares these three options in simulations against a baseline in which no assets are used to obtain lifetime income. In each option, assets not allocated to purchasing lifetime income are consumed following the Required Minimum Distribution rules. The analysis finds that, when market and health shocks are included alongside longevity uncertainty, the Social Security bridge option is generally the best for households with median wealth. Wealthier households can benefit from combining the bridge option with a deferred annuity. Part of a symposium sponsored by the Economics of Aging Interest Group.

Sign in / Sign up

Export Citation Format

Share Document