Individual Welfare Gains from Deferred Life-Annuities under Stochastic Mortality
32 Pages Posted: 17 Apr 2009 Last revised: 11 Apr 2012
Date Written: April 11, 2012
At the end of the deferment period a deferred annuity’s policyholder can choose between receiving annuity payouts or the capital accumulated. Considering stochastic mortality improvements, this is a valuable option for the policyholder. Whenever mortality improves less than expected at contract inception, the policyholder will choose the lump-sum and buy an annuity at current market prices. Otherwise, he will retain the more favorable deferred annuity. We use a life-cycle model and calculate the welfare gains of deferred annuities considering stochastic mortality improvements. Deferred annuities are found to substantially improve the welfare of an individual. The option feature is especially valuable in the presence of adverse selection problems. The results derived are relevant for individual retirement planning and pension system design.
Keywords: Stochastic Mortality, Annuitization, Individual Retirement Planning, Pensions
JEL Classification: D14, D81, D91, G11, G22, J11, J26
Suggested Citation: Suggested Citation