How Deep is the Annuity Market Participation Puzzle?
45 Pages Posted: 3 Mar 2008
Date Written: January 11, 2008
Using U.K. microeconomic data, we analyze the empirical determinants of voluntary annuity market demand. We find that annuity market participation increases with financial wealth, life expectancy and education and decreases with other pension income and a possible bequest motive for surviving spouses. We then show that these empirically-motivated determinants of annuity market participation have the same, quantitatively important, effects in a life-cycle model of annuity demand, saving and portfolio choice. Moreover, reasonable preference parameters predict annuity demand levels comparable to the data, thereby questioning the conventional wisdom that limited annuity market participation is a puzzle to be explained.
Keywords: Annuities, portfolio choice, bequest motive
JEL Classification: E21, H00
Suggested Citation: Suggested Citation