Addressing the Pension Decumulation Phase of Employee Retirement Planning

Longevity increases and population ageing create challenges for all societal institutions, particularly those providing retirement income, healthcare, and long-term care services. At the individual level, an obvious question is how to ensure all retirees have an adequate, secure, stable, and predictable lifelong income stream that will allow them to maintain a target standard of living for, however, long the individual lives. In this chapter, we review and discuss the main pension decumulation options by explicitly modelling consumers’ behaviour and objectives though an objective function based on utility theory accounting for consumption and bequest motives and different risk preferences. Using a Monte-Carlo simulation approach calibrated to US financial market and mortality data, our results suggest that purchasing a capped participating longevity-linked life annuity at retirement including embedded longevity and financial options that allow the annuity provider to periodically revise annuity payments if observed survivorship and portfolio outcomes deviate from expected (or guaranteed) values at contract initiation deliver superior welfare results when compared with classical annuitization and non-annuitization decumulation strategies.

How Does Health Status Affect Marginal Utility of Consumption? Evidence from China

This paper investigates how the deteriorating health status of an individual affects the marginal utility of non-medical consumption in China. By using 2011, 2013 and 2015 China Health and Retirement Longitudinal Study (CHARLS) data, we find that when the number of chronic diseases increases one standard deviation, the marginal utility of consumption will increase by 16.0% and 20.0% for samples of the middle-aged and elderly individuals over 50 and 65 years of age, respectively. This result is to some extent contrary to the findings from the US. Different economic development stages, intergenerational norms and bequest motives may be reasons for these contrasting patterns between China and the US.