1 / 9

Unraveling the Annuity Puzzle: Altruism, Welfare, and Economic Decisions

Explore the complexities of annuity and life insurance demand models, with a focus on altruism, welfare economics, and optimal policy approaches. Investigate the impact of resource shocks, altruistic motives, and determinants of annuity market participation. Delve into EPDV calculations and the role of social security in influencing annuity purchases.

vpreece
Download Presentation

Unraveling the Annuity Puzzle: Altruism, Welfare, and Economic Decisions

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  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

More Related