Annuity Markets and Retirement Security

Center for Retirement Research at Boston College, 2001

Posted: 10 Mar 2010

See all articles by James M. Poterba

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: June 1, 2001

Abstract

This paper describes the role of adverse selection in annuity markets, and sketches some of the public policy implications of the existence of such selection effects. It shows that a substantial fraction of the difference between the expected value of the payouts on both voluntary and compulsory annuity products in the U.K., and the premium cost of those products, is attributable to adverse selection. This is simply the fact that the individuals who currently choose to purchase annuities are on average longer-lived than randomly-selected individuals in the U.K. population. Adverse selection is most pronounced in the voluntary annuity market, but there is also some evidence of selection in the compulsory market, where individuals can choose which type of annuity to purchase and how much of their defined contribution balance to annuitize.

Requiring all persons to annuitize their retirement account balances at a specified age is one way to substantially reduce the degree of adverse selection in the annuity market. More generally, however, any policy that encourages a large fraction of the population to participate in the annuity market is likely to have a similar effect. Doyle, Mitchell, and Piggott (2001) compare the annuity markets in Australia and Singapore, and they find a greater degree of adverse selection in the former than the latter. They attribute this difference to the relatively generous government old-age safety net in Australia, which reduces the fraction of households that find it attractive to purchase private annuities...

Suggested Citation

Poterba, James M., Annuity Markets and Retirement Security (June 1, 2001). Center for Retirement Research at Boston College, 2001. Available at SSRN: https://ssrn.com/abstract=1127863

James M. Poterba (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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