A tFragedy of Annuitization? Longevity Insurance in General Equilibrium
Ben J. Heijdra
University of Groningen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for Advanced Studies (IHS)
Jochen O. Mierau
University of Groningen; Netspar
Laurie S.M. Reijnders
University of Groningen
June 1, 2011
Netspar Discussion Paper No. 07/2010-034
We construct a tractable discrete-time overlapping generations model of a closed economy and use it to study government redistribution of accidental bequests and private annuities in general equilibrium. Individuals face longevity risk as there is a positive probability of passing away before the retirement period. We find non-pathological cases where it is better for long-run welfare to waste accidental bequests than to give them to the elderly. Next we study the introduction of a perfectly competitive life insurance market offering actuarially fair annuities. There exists a tragedy of annuitization: although full annuitization of assets is privately optimal it is not socially beneficial due to adverse general equilibrium repercussions.
Number of Pages in PDF File: 31
Keywords: longevity risk, risk sharing, overlapping generations, intergenerational transfers, annuity markets
JEL Classification: D52, D91, E10, J20working papers series
Date posted: October 17, 2010 ; Last revised: August 21, 2011
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