An Overview of International Deferred Annuity Markets

AbstractWe examine how the absence of annuities in financial markets affects capital accumulation in a two-period overlapping generations model. Our findings indicate that the effect on capital is ambiguous in general equilibrium, because there are two competing mechanisms at work. On the one hand, the absence of annuities increases the price of old-age consumption relative to the price of early-life consumption. This induces a substitution effect that reduces saving and capital, and an income effect that has the opposite effect as households want to consume less when young, causing them to save more. On the other hand, accidental bequests originate from the assets of the deceased under missing annuity markets. The bequest received in early life always has a positive income effect on saving, but the bequest received in old age, conditional on survival, is effectively a partial annuity with both substitution and income effects. We find that when the desire to smooth consumption is high, the income effects dominate, so the capital stock always increases when annuity markets are missing. However, when the desire to smooth consumption is low, the substitution effects dominate, and the capital stock decreases with missing annuity markets.

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

Innovation in Aging ◽

10.1093/geroni/igaa057.2395 ◽

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.

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Cumulative prospect theory and deferred annuities

Review of Behavioral Finance ◽

10.1108/rbf-10-2017-0102 ◽

2019 ◽

Vol 11 (3) ◽

pp. 277-293 ◽

Cited By ~ 1

Author(s):

Anran Chen ◽

Steven Haberman ◽

Stephen Thomas

Keyword(s):

Prospect Theory ◽

Loss Aversion ◽

Design Methodology ◽

Behavioral Model ◽

Cumulative Prospect Theory ◽

Optimal Consumption ◽

Content Type ◽

Deferred Annuity ◽

To Receive

Purpose Although it has been proved theoretically that annuities can provide optimal consumption during one’s retirement period, retirees’ reluctance to purchase annuities is a long-standing puzzle. The purpose of this paper is to use behavioral model to analyze the low demand for immediate annuities. Design/methodology/approach The authors employ cumulative prospect theory (CPT), which contains both loss aversion and probability transformations, to analyze the annuity puzzle. Findings The authors show that CPT can explain the unattractiveness of immediate annuities. It also shows that retirees would be willing to buy a long-term deferred annuity at retirement. By considering each component from CPT in turn, the loss aversion is found to be the major reason that stops people from buying an annuity while the survival rate transformation is an important factor affecting the decision of when to receive annuity incomes. Originality/value This paper identifies CPT as one of the reasons for the low demand of immediate annuities. It further suggests that long-term deferred annuities could overcome behavioral obstacles and become popular among retirees.

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On Assurances against the Risk of ‘Invalidity’ or Permanent Inability to Work

Journal of the Institute of Actuaries and Assurance Magazine ◽

10.1017/s204616740004979x ◽

1869 ◽

Vol 15 (2) ◽

pp. 143-145

Author(s):

Wilhelm Lazarus

Keyword(s):

Old Age ◽

Premature Death ◽

The Real ◽

Life Assurance ◽

The Family ◽

Inability To Work ◽

Deferred Annuity

Life Assurance provides for the family of the deceased in case of premature death; deferred Annuities provide for old age; but both institutions leave uncovered the risk of premature inability to work. Invalidity Assurance, including the benefits of a deferred Annuity, would be the real complement to Life Assurance. This truth is so deeply felt in Germany, that a good many institutions, employing a large number of officers, workmen, and labourers; many mills, and particularly the Railway Companies, long since directed their attention to the providing for their officers in case of their being invalided. How were they to calculate the annual contribution, how to make the valuation of their liabilities?

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