Crowd-Out, Adverse Selection and Information in Annuity Markets: Evidence from a New Retrospective Data Set in Chile

42 Pages Posted: 21 Feb 2008

See all articles by Alejandra Cox Edwards

Alejandra Cox Edwards

California State University, Long Beach - Department of Economics

Estelle James

Consultant

Date Written: December 2006

Abstract

Annuitization is often considered a socially desirable payout mode from pension plans, because it provides a lifelong income stream and therefore ensures that retirees will not run out of money. However, annuitization is rare in most countries. This project examines workers' choices during the payout stage in Chile, the only country that has had mandatory personal accounts long enough to have had substantial experience with payouts. Upon retirement, workers in Chile have limited options for payouts: they must either annuitize or take gradual withdrawal. Two-thirds have annuitized. We expect that retirees are less likely to annuitize if their accumulation finances a pension in the vicinity of the minimum pension, whose value is guaranteed by the state. In that case, publicly-financed longevity insurance is likely to crowd out private annuity insurance. We expect that retirees with health problems are also less likely to annuitize, possibly leading to adverse selection. Finally, we expect that individuals with greater risk aversion, smaller time preference and better knowledge about the system are more likely to annuitize. A new retrospective data set from Chile yields evidence that is broadly consistent with these hypotheses.

Suggested Citation

Cox Edwards, Alejandra and James, Estelle, Crowd-Out, Adverse Selection and Information in Annuity Markets: Evidence from a New Retrospective Data Set in Chile (December 2006). Michigan Retirement Research Center Research Paper No. WP 2006-147. Available at SSRN: https://ssrn.com/abstract=1095317 or http://dx.doi.org/10.2139/ssrn.1095317

Alejandra Cox Edwards

California State University, Long Beach - Department of Economics ( email )

1250 Bellflower Blvd
Long Beach, CA 90840-4607
United States
562-985-5969 (Phone)
562-985-5804 (Fax)

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