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“The Annuity Puzzle” by Richard MacMinn, Daniel Bauer, & Frederik Weber

“The Annuity Puzzle” by Richard MacMinn, Daniel Bauer, & Frederik Weber. Comments by James Poterba 25 September 2009. Modeling Demand for Both Life Insurance and Annuities. Little Attention to Explaining Both Demands in One Model: Corner Solutions Often Emerge

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“The Annuity Puzzle” by Richard MacMinn, Daniel Bauer, & Frederik Weber

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  1. “The Annuity Puzzle” by Richard MacMinn, Daniel Bauer, & Frederik Weber Comments by James Poterba 25 September 2009

  2. Modeling Demand for Both Life Insurance and Annuities • Little Attention to Explaining Both Demands in One Model: Corner Solutions Often Emerge • Notable Exception: Bernheim’s (1991 JPE) Empirical Study of Annuity and Life Insurance Demand • A Satisfactory Model Should Explain Both

  3. Altruism: A Generalization of Bequest Motive • How Can We Distinguish Altruism from a “Simple” Bequest Motive? • What Does Altruism Imply About Inter vivos Gifts? Strong Predictions About Impact of Resource Shocks within Groups Linked by Altruism • Is Altruism Defined Over Utility of Other Individual or Over Consumption?

  4. Welfare Economics with Altruism • Optimal Public Policy Calls for Subsidizing Gifts (Both Donor and Donee Benefit) • A Person Who Attracts Altruistic Attention from Many Individuals Should Receive More Resources

  5. Leading Explanations for Small Annuity Markets • Precautionary Demand for Liquid Wealth: Risk of Health Care Bills, “Strategic” Demand • Unattractive Annuity Prices: Adverse Selection, Insurance Company Profits, Mortality Pessimism • Bequest or Altruistic Motives • Regret-Aversion

  6. Results from “Standard” Stochastic Lifecycle Models • For One Person, with Uncertain Mortality and without Social Security or Late-Life Medical Costs, Even if EPDV = 0.80, Annuity Market Participation is Attractive • Introducing Social Security (Consumption Floor) or Marriage Partner Substantially Raises Threshold for Annuity Purchase

  7. Expected Present Discounted Value (EPDV) of Annuity Payouts per Premium Dollar • EPDVNOM = Σt=1,TSt*ANOM/{Πj=1,t(1+ij)} • Survival Rates – Population Mortality vs. Annuitant Mortality, Projected Forward • Discount Rates – Riskless Treasuries vs. High-Grade Corporates • EPDV Does Not Recognize Insurance Value of Annuity to Individual

  8. Money’s Worth of Individual Annuities: U.S. 2009

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