The Cost of Annuities: Implications for Saving Behavior and Bequests / Benjamin M. Friedman, Mark Warshawsky.

Format:

Book

Author/Creator:

Friedman, Benjamin M.

Contributor:

National Bureau of Economic Research.

Warshawsky, Mark.

Series:

Working Paper Series (National Bureau of Economic Research) no. w1682.

NBER working paper series no. w1682

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

The Cost of Annuities

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1985.

Summary:

The fact that most eldealy individuals in the United States choose to maintain a flat age-wealth profile, rather than buy individual life annuities, stands in contrast to central implications of the standard life-cycle model of consumption-saving behavior. The analysis in this paper lends support to an explanation for this phenomenon based either on the cost of annuities, importantly including the element of that cost due to adverse selection, or on the interaction of that cost and an intentional bequest motive. Expected yields offered on individual life annuities in the United States are lower by some 4-6%, or 2 1/2-4 1/2% after allowing for adverse selection, than yields on alternative long-term fixed-income investments. Simulations of an extended model of life-cycle saving and portfolio behavior, allowing explicitly for uncertain lifetimes and Social Security, show that yield differentials in this range can account for the observed behavior, even in the absence of a bequest motive, during the early years of retirement. By contrast, at older ages the combination of yield differentials in this range and a positive bequest motive is necessary to do so.

Notes:

Print version record

August 1985.