Optimal Annuitization with Stochastic Mortality Probabilities / Felix Reichling, Kent Smetters.

Format:

Book

Author/Creator:

Reichling, Felix.

Contributor:

Smetters, Kent.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w19211.

NBER working paper series no. w19211

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2013.

Washington, DC : Congressional Budget Office, 2013.

Summary:

The conventional wisdom dating back to Yaari (1965) is that households without a bequest motive should fully annuitize their investments. Numerous market frictions do not break this sharp result. We modify the Yaari framework by allowing a household's mortality risk itself to be stochastic. Annuities still help to hedge longevity risk, but they are now subject to valuation risk. Valuation risk is a powerful gateway mechanism for numerous frictions to reduce annuity demand, even without ad hoc "liquidity constraints." We find that most households should not annuitize any wealth. The optimal level of aggregate net annuity holdings is likely even negative.

Notes:

July 2013.

Includes bibliographical references (pages 41-44).

Print version record

OCLC:

1262126420