_________________________________________________________________
E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 6, No. 9: May 5, 2005
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Publisher: Employment, Labor, Compensation & Pension Law Journals
a division of
Social Science Electronic Publishing, Inc. (SSEP)
and Social Science Research Network (SSRN)
Editor: PAMELA PERUN
Urban Institute
Mailto:pamela@planetnow.com
Copyright: SSEP, Inc. 2005. All rights reserved.
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Topic of This Issue:
Annuity Issues
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T A B L E of C O N T E N T S
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NEW and FORTHCOMING ARTICLES
"Social Security: What Role for Life Annuities in Individual
Accounts? Issues, Options, and Tradeoffs"
Social Security Brief, No. 19, March 2005
VIRGINIA P. RENO
National Academy of Social Insurance (NASI)
JONI LAVERY
National Academy of Social Insurance (NASI)
"Putting Annuities Back Into Savings Plans"
Society of Actuaries, Symposium on Managing Retirement
Assets, 2004
PAMELA PERUN
Urban Institute
"Annuity Values in Defined Contribution Retirement Systems:
Australia and Singapore Compared"
Australian Economic Review, Vol. 37, No. 4, pp. 402-416,
December 2004
SUZANNE DOYLE
University of New South Wales
School of Economics
OLIVIA S. MITCHELL
Wharton School
National Bureau of Economic Research (NBER)
JOHN PIGGOTT
University of New South Wales
School of Economics
WORKING PAPERS
"Annuities and Individual Welfare"
THOMAS DAVIDOFF
University of California, Berkeley
Haas School of Business
JEFFREY R. BROWN
University of Illinois at Urbana-Champaign
Department of Finance
National Bureau of Economic Research (NBER)
PETER A. DIAMOND
Massachusetts Institute of Technology (MIT)
Department of Economics
National Bureau of Economic Research (NBER)
"More Social Security, Not Less"
WILLIAM N. GOETZMANN
Yale School of Management - International Center
for Finance
National Bureau of Economic Research (NBER)
"Adverse Selection with Individual- and Joint-life Annuities"
SUSANNE PECH
University of Linz
Department of Economics
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N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"Social Security: What Role for Life Annuities in Individual
Accounts? Issues, Options, and Tradeoffs"
Social Security Brief, No. 19, March 2005
BY: VIRGINIA P. RENO
National Academy of Social Insurance (NASI)
JONI LAVERY
National Academy of Social Insurance (NASI)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=686843
Contact: JONI LAVERY
Email: Mailto:jlavery@nasi.org
Postal: National Academy of Social Insurance (NASI)
1776 Massachusetts Avenue, NW
Suite 615
Washington, DC 20036-1904 UNITED STATES
Co-Auth: VIRGINIA P. RENO
Email: Mailto:vreno@nasi.org
Postal: National Academy of Social Insurance (NASI)
1776 Massachusetts Avenue, NW
Suite 615
Washington, DC 20036-1904 UNITED STATES
ABSTRACT:
Life annuities are products sold by insurance companies to
protect retirees against the risk of outliving their money. A
life annuity is a once-in-a-lifetime purchase with lifelong
consequences. Requiring retirees to buy life annuities with
their individual accounts has advantages and disadvantages.
Mandatory annuities cost less on average, while voluntary
annuities cost more because shortlived people tend not to buy
them. An inherent tension exists between the interests of heirs
and the purchase of annuities because money used to buy a life
annuity is no longer available to leave to heirs. The timing of
annuity purchase can have an important impact on the amount of
funds left for a widowed spouse or other heirs. Retirees may
want help in understanding the impact of different decisions on
their own financial security and that of their spouses,
dependents, and other heirs.
This brief draws on analyses and findings in the study panel
report, Uncharted Waters: Paying Benefits from Individual
Accounts in Federal Retirement Policy, to highlight key points
about the purchase of life annuities at retirement from the
perspective of single and married retirees.
______________________________
"Putting Annuities Back Into Savings Plans"
Society of Actuaries, Symposium on Managing Retirement
Assets, 2004
BY: PAMELA PERUN
Urban Institute
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=696842
Contact: PAMELA PERUN
Email: Mailto:pamela@planetnow.com
Postal: Urban Institute
2100 M Street, NW
Washington, DC 20037 UNITED STATES
Phone: 510-644-9410
ABSTRACT:
Every year, millions of dollars flow into 401(k)-type and other
savings plans. As large numbers of Baby Boomers begin to retire
in a few short years, millions of dollars will start to flow
out. Most workers will be on their own in managing their savings
during retirement because most plan sponsors deliberately
restrict their plans to lump sum distributions. This paper
explains how legal reforms in the early 1990s increased the risk
of fiduciary liability associated with annuities, a
well-respected technique for managing income in retirement, and
decreased their popularity among plan sponsors. It argues that
those reforms, largely intended to protect participants in
defined benefit plans, have proved counter-productive for
savings plan participants. It then describes how a proposal for
a federal charter option for life insurance companies could hold
some promise for persuading plan sponsors to put annuities back
into savings plans.
______________________________
"Annuity Values in Defined Contribution Retirement Systems:
Australia and Singapore Compared"
Australian Economic Review, Vol. 37, No. 4, pp. 402-416,
December 2004
BY: SUZANNE DOYLE
University of New South Wales
School of Economics
OLIVIA S. MITCHELL
Wharton School
National Bureau of Economic Research (NBER)
JOHN PIGGOTT
University of New South Wales
School of Economics
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=629924
Contact: JOHN PIGGOTT
Email: Mailto:J.Piggott@unsw.edu.au
Postal: University of New South Wales
School of Economics
Sydney NSW 2052, ACT 2600 AUSTRALIA
Co-Auth: SUZANNE DOYLE
Email: Mailto:Suzanne_Doyle@amp.com.au
Postal: University of New South Wales
School of Economics
Sydney NSW 2052, ACT 2600 AUSTRALIA
Co-Auth: OLIVIA S. MITCHELL
Email: Mailto:mitchelo@wharton.upenn.edu
Postal: Wharton School
Philadelphia, PA 19104-6365 UNITED STATES
ABSTRACT:
Annuities promise to play an increasingly important role in
countries with national defined contribution retirement systems.
In this article we examine life annuities in two countries,
Singapore and Australia, each of which has a national mandatory
pension program. Exploiting data on annuity pricing and purchase
behaviour, we compare the money's worth of life annuity products
across these two nations. Our results indicate that, after
controlling on administrative loadings, there are important
differences in measured adverse selection. Part of the
explanation may be due to the different structures of the two
countries' retirement systems.
______________________________
W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Annuities and Individual Welfare"
BY: THOMAS DAVIDOFF
University of California, Berkeley
Haas School of Business
JEFFREY R. BROWN
University of Illinois at Urbana-Champaign
Department of Finance
National Bureau of Economic Research (NBER)
PETER A. DIAMOND
Massachusetts Institute of Technology (MIT)
Department of Economics
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=405621
Paper ID: MIT Department of Economics Working Paper No. 03-15;
AFA 2005 Philadelphia Meetings
Date: March 17, 2005
Contact: PETER A. DIAMOND
Email: Mailto:pdiamond@mit.edu
Postal: Massachusetts Institute of Technology (MIT)
Department of Economics
Room E52-344
50 Memorial Drive
Cambridge, MA 02142 UNITED STATES
Phone: 617-253-3363
Fax: 617-253-7804
Co-Auth: THOMAS DAVIDOFF
Email: Mailto:davidoff@haas.berkeley.edu
Postal: University of California, Berkeley
Haas School of Business
545 Student Services Building
Berkeley, CA 94720 UNITED STATES
Co-Auth: JEFFREY R. BROWN
Email: Mailto:brownjr@uiuc.edu
Postal: University of Illinois at Urbana-Champaign
Department of Finance
1206 South Sixth Street
Champaign, IL 61820 UNITED STATES
Paper Requests:
Contact: Linda Woodbury, MIT Department of Economics, E52-251;
50 Memorial Drive; Cambridge, MA 02142. Phone:(617)253-8885.
Fax:(617)253-1330. Mailto:lwoodbur@mit.edu Individual working
papers $7 (domestic including Canada and Mexico) and $10
international.
ABSTRACT:
Advancing annuity demand theory, we present sufficient
conditions for the optimality of full annuitization under market
completeness that are substantially less restrictive than those
used by Yaari (1965). We examine demand with market
incompleteness, finding that positive annuitization remains
optimal widely, but complete annuitization does not. How
uninsured medical expenses affect demand for illiquid annuities
depends critically on the timing of the risk. A new set of
calculations with optimal consumption trajectories very
different from available annuity income streams still shows a
preference for considerable annuitization, suggesting that
limited annuity purchases are plausibly due to psychological or
behavioral biases.
JEL Classification: D11, D91, E21, H55, J14, J26
______________________________
"More Social Security, Not Less"
BY: WILLIAM N. GOETZMANN
Yale School of Management - International Center
for Finance
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=703141
Paper ID: Yale ICF Working Paper No. 05-05
Date: April 12, 2005
Contact: WILLIAM N. GOETZMANN
Email: Mailto:WILLIAM.GOETZMANN@YALE.EDU
Postal: Yale School of Management - International Center for
Finance
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200 UNITED STATES
Phone: 203-432-5950
Fax: 203-432-8931
ABSTRACT:
This paper explores the feasibility of a government-sponsored
insurance company, patterned after the government-sponsored
mortgage agencies, that would be authorized to sell
government-insured wage-indexed retirement annuities. This
enterprise would assume the current obligations and cash flows
of the social security system in exchange for the exclusive
right to sell additional insurance contracts. It may or may not
choose to finance itself through the issuance of equity shares.
The empirical analysis in the paper focuses on the stochastic
nature of the liabilities faced by such an agency and in
particular examines the optimal portfolio of assets required to
hedge wage-indexed liabilities.
JEL Classification: G22, H55
______________________________
"Adverse Selection with Individual- and Joint-life Annuities"
BY: SUSANNE PECH
University of Linz
Department of Economics
Paper ID: University of Linz Economics Working Paper No. 0412
Date: November 2004
Contact: SUSANNE PECH
Email: Mailto:susanne.pech@jku.at
Postal: University of Linz
Department of Economics
Altenbergerstrasse 69
A-4040 Linz, AUSTRIA
ABSTRACT:
This paper includes couples on the demand side and analyses
their implications on the problem of adverse selection in the
annuity market. First, we examine the pooling equilibrium for
individual-life annuities and show that in the presence of
couples the rate of return on individual-life annuities is lower
in case that couples do not have the advantage of joint
consumption of family public goods as well as in case of a
logarithmic utility function. Second, we examine the market for
joint-life annuities. Due to their higher chance that only one
partner survives to the retirement, couples with short-lived
partners put more weight on the survivor benefit than couples
with at least one longer-lived partner. This fact is used by
annuity companies to separate couples according to their
partners' life-expectancies. Hence, we find that only a
separating equilibrium may exist. These results are obtained in
a framework where couples are mandated to buy joint-life
annuities and only single persons buy individual-life annuities.
When relaxing this assumption by allowing couples to choose
between individual- and joint-life annuities, we find that in
equilibrium couples with long-lived partners buy individual-life
annuities, while couples with short-lived partners buy
joint-life annuities. However, couples with one long-lived and
one short-lived partner may decide for either type of annuities,
depending on the exogenous parameters. Accordingly, we identify
two different types of equilibria.