Note: PRC requires free registration before providing working papers.
“Optimal Life Cycle Portfolio Choice with Variable Annuities Offering Liquidity and Investment Downside Protection,” by Vanya Horneff, Olivia S. Mitchell, Raimond Maurer, and Ralph Rogalla (WP 2013-04, June 2013, .pdf format, 39p.). Note: Links to the abstract and full-text can be found at:
www.pensionresearchcouncil.org/publications/document.php?file=1107
“Cohort mortality risk or adverse selection in the UK annuity market?” by Edmund Cannon and Ian Tonks (PI-1304, April 2013, .pdf format, 42p.).
Abstract:
The “money’s worth” measure has been used to assess whether annuities are fairly valued and also as evidence for adverse selection in the annuity market. However, a regulated life assurer with concerns about predicting long-run mortality may price annuities to reduce these risks which will affect the money’s worth. We provide a simple model of the effect of cohort mortality risk on the money’s worth. We demonstrate that cohort mortality risk is quantitatively important, and show that it is not possible to identify the effect of a cohort mortality risk model from that of an adverse selection model.
“Adjusted Money’s Worth Ratios In Life Annuities,” by Jaime Casassus and Eduardo Walker (PI-1303, February 2013, .pdf format, 53p.).
Abstract:
The Money’s Worth Ratio (MWR) measures an annuity’s actuarial fairness. It is calculated as the discounted present value of the annuity’s expected future payments divided by its cost. We argue that, this measure may overestimate the value-for-money obtained by annuitants, since it does not adjust for liquidity or risk factors. Measuring these factors is challenging, requiring detailed knowledge of the annuity provider’s assets, liabilities, and of the stochastic processes followed by them. Using a multi-factor continuous-time model and option pricing theory, we propose a simple solution for an Adjusted MWR (AMWR), which does consider illiquidity and default risk. We implement this solution for the competitive Chilean annuity market, which offers unadjusted MWRs above 1, finding that indeed these ratios are biased upward 7 percent on average. We also present estimates of default option values, asset insufficiency probabilities and implied credit spreads for each annuity provider.
A. “The Economic Importance of Financial Literacy: Theory and Evidence,” by Annamaria Lusardi and Olivia S. Mitchell (WP2013-02, March 2013, .pdf format, 63p.). Note: Links to the abstract and full-text can be found at:
www.pensionresearchcouncil.org/publications/document.php?file=1040
B. “Complexity as a Barrier to Annuitization: Do Consumers Know How to Value Annuities?” by Jeffrey R. Brown, Arie Kapteyn, Erzo F. P. Luttmer, and Olivia S. Mitchell (WP2013-01, March 2013, .pdf format, 50p.). Note: Links to the abstract and full-text can be found at:
www.pensionresearchcouncil.org/publications/document.php?file=1040
“Retirement Security: Annuities with Guaranteed Lifetime Withdrawals Have Both Benefits and Risks, but Regulation Varies across States,” (GAO-13-75, December 2012, .pdf format, 37p.).
A. “Active vs. Passive Decisions and Crowdout in Retirement Savings Accounts: Evidence from Denmark,” by Raj Chetty, John N. Friedman, Soren Leth-Petersen, Torben Nielsen, and Tore Olsen (w18565, November 2012, .pdf format, 74p.).
Abstract:
Do retirement savings policies – such as tax subsidies or employer-provided pension plans – increase total saving for retirement or simply induce shifting across accounts? We revisit this classic question using 45 million observations on savings for the population of Denmark. We find that a policy’s impact on total savings depends critically on whether it changes savings rates by active or passive choice. Tax subsidies, which rely upon individuals to take an action to raise savings, have small impacts on total wealth. We estimate that each $1 of tax expenditure on subsidies increases total saving by 1 cent. In contrast, policies that raise savings automatically even if individuals take no action – such as employer-provided pensions or automatic contributions to retirement accounts – increase wealth accumulation substantially. Price subsidies only affect the behavior of active savers who respond to incentives, whereas automatic contributions increase savings of passive individuals who do not reoptimize. We estimate that 85% of individuals are passive savers. The 15% of active savers who respond to price subsidies do so primarily by shifting assets across accounts rather than reducing consumption. These individuals also o set changes in automatic contributions and have higher wealth-income ratios. We conclude that automatic contributions are more effective at increasing total retirement savings than price subsidies for three reasons: (1) subsidies induce relatively few individuals to respond, (2) they generate substantial crowdout conditional on response, and (3) they do not influence the savings behavior of passive individuals, who are least prepared for retirement.
B. “What Makes Annuitization More Appealing?” by John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian, and Stephen P. Zeldes (w18575, November 2012, .pdf format, 25p.).
Abstract:
We conduct and analyze two large surveys of hypothetical annuitization choices. We find that allowing individuals to annuitize a fraction of their wealth increases annuitization relative to a situation where annuitization is an ‘all or nothing’ decision. Very few respondents choose declining real payout streams over flat or increasing real payout streams of equivalent expected present value. Highlighting the effects of inflation increases demand for cost of living adjustments. Frames that focus on flexibility, control, and investment risk significantly reduce annuitization. A majority of respondents prefer to receive an extra ‘bonus’ payment during one month of the year that is funded by slightly lower payments in the remaining months. Concerns about later-life income, spending flexibility, and counterparty risk are the most important self-reported motives that influence the annuitization decision, whereas the desire to leave a bequest has little influence on this decision.
“Behavioral Biases and Long Term Care Annuities: A Political Economy Approach,” by Philippe De Donder and Marie-Louise Leroux (CESifo Working Paper No. 3972, October 2012, .pdf format, 38p.). Note: Links to the abstract and full-text can be found at:
www.cesifo-group.de/ifoHome/publications/working-papers/CESifoWP/CESifoWPdetails?wp_id=19068534
“Do Default and Longevity Annuities Improve Annuity Take-Up Rates? Results from an Experiment,” by Robert Gazzale, Sandy Mackenzie, and Lina Walker (October 2012, .pdf format, 28p.).
Note: PRC requires free registration before providing working papers.
A. “The Evolution of Workplace Advice,” by Christopher L. Jones and Jason S. Scott (WP2012-10, September 2012, .pdf format, 28p.). Note: Links to the abstract and full-text can be found at:
www.pensionresearchcouncil.org/publications/document.php?file=1026
B. “The Role of Guidance in the Annuity Decision Making Process,” by Kelli Hueler and Anna Rappaport (WP2012-11, September 2012, .pdf format, 38p.). Note: Links to the abstract and full-text can be found at:
www.pensionresearchcouncil.org/publications/document.php?file=1027
“Annuities and Your Nest Egg: Reforms to Promote Optimal Annuitization of Retirement Capital,” by Norma L. Nielson (Commentary 358, August 2012, .pdf format, 24p.).
Note: PRC requires free registration before providing working papers. “Participating Payout Life Annuities: Lessons from Germany,” by Raimond Maurer, Ralph Rogalla, and Ivonne Siegelin (WP2012-03, July 2012, .pdf format, 32p.). Note: Links to the abstract and full-text can be found at:
www.pensionresearchcouncil.org/publications/document.php?file=1017
A. “Older Americans’ Ambivalence Toward Annuities,” by Sandy Mackenzie (June 2012, .pdf format, 30p.).
B. “Medicare Part D’s Medication Therapy Management: Shifting from Neutral to Drive,” by N. Lee Rucker (June 2012, .pdf format, 12p.).
www.aarp.org/health/medicare-insurance/info-06-2012/medicare-part-d-mtm-AARP-ppi-health.html
“Do Consumers Know How to Value Annuities? Complexity as a Barrier to Annuitization,” by by Jeffrey R. Brown, Arie Kapteyn, Erzo F.P. Luttmer, and Olivia Mitchell (WR-924, 2011, .pdf format, 42p.). Note: Links to the abstract and full-text can be found at:
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