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Household annuitization decisions: simulations and empirical analyses

Published online by Cambridge University Press:  11 October 2004

IRENA DUSHI
Affiliation:
International Longevity Center-USA (e-mail: tonyw@ilcusa.org)
ANTHONY WEBB
Affiliation:
International Longevity Center-USA (e-mail: tonyw@ilcusa.org)

Abstract

Annuities provide insurance against outliving one's wealth. Previous studies have indicated that, for many households, the value of the longevity insurance should outweigh the actuarial unfairness of prices in the voluntary annuity market. Nonetheless, voluntary annuitization rates are extremely low.

Previous research on the value of annuitization has compared an optimal decumulation of unannuitized wealth with the alternative of annuitizing all unannuitized wealth at age 65. We relax these assumptions, allowing households to annuitize any part of their unannuitized wealth at any age and to return to the annuity market as many times as they wish.

Using numerical optimization techniques, assuming the levels of actuarial unfairness of annuities calculated in previous research, and retaining the assumption made in previous research that one half of household wealth is pre-annuitized, we conclude that it is optimal for couples to delay annuitization until they are aged 73–82, and in some cases never to annuitize. It is usually optimal for single men and women to annuitize at substantially younger ages, between 65 and 70. Households that annuitize will generally wish to annuitize only part of their unannuitized wealth.

Using data from the Asset and Health Dynamics Among the Oldest Old and Health and Retirement Study panels, we show that much of the failure of the average currently retired household to annuitize can be attributed to the exceptionally high proportions of the wealth of these cohorts that is pre-annuitized. We expect younger cohorts to have smaller proportions of pre-annuitized wealth and project increasing demand for annuitization as successive cohorts age.

Type
Research Article
Copyright
2004 Cambridge University Press

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Footnotes

The research reported herein was performed pursuant to a grant from the US Social Security Administration (SSA) to the Center for Retirement Research at Boston College (CRR). This grant was awarded through the CRR's Steven H. Sandell Grant Program for Junior Scholars in Retirement Research. The opinions and conclusions are solely those of the authors and should not be construed as representing the opinions or policy of the SSA or any agency of the Federal Government or of the CRR. We would like to thank John Ameriks, Jeffrey Brown, Marjorie Flavin, Leora Friedberg, Kathleen McGarry, Sara Rix, participants at the Society of Actuaries 2002 Annual Meeting, the Fifth Annual Retirement Consortium Conference (May 2003), the International Social Security Association Conference (May 2003), the CESIFO Venice Summer Institute (July 2003), the Conference on Improving Social Insurance Programs at the University of Maryland (September 2003) and colleagues at the International Longevity Center for very helpful comments. We are grateful to Ben Tarlow and Gregor Franz for research assistance.
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