When can Insurers Offer Products that Dominate Delayed Old-Age Pension Benefit Claiming?

36 Pages Posted: 16 Jun 2010

See all articles by Lisanne Sanders

Lisanne Sanders

Tilburg University - CentER for Economic Research; Netspar

Anja De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER

Theo Nijman

Tilburg University - Tilburg University School of Economics and Management

Date Written: April 1, 2010

Abstract

It is common practice for public pension schemes to offer individuals the option to delay benefit claiming until after the normal retirement age and adjust the annual benefit level as a result. This adjustment is often not actuarially neutral with respect to the age at which benefits are claimed. The degree of actuarial nonequivalence varies by interest rates as well as individual characteristics such as gender and age. In this paper we show that actuarial nonequivalence can imply that deferring benefit claiming is suboptimal, irrespective of the preferences of the individual. Specifically, we derive preference-free conditions under which delaying benefit claiming is dominated by claiming benefits early, and using them to buy super-replicating annuity products from an insurance company. We find that the degree of actuarial nonequivalence in public pension schemes is such that such dominating strategies can exist even when the purchase of annuities would be significantly more costly than what is currently observed. If individuals choose to strategically exploit these dominating strategies, this will affect benefit claiming behavior, which in turn affects long run program costs.

Keywords: Pension Benefit Claiming, Delay Options, Actuarial Nonequivalence, Preference-Free Dominance

JEL Classification: H55, D14, G22

Suggested Citation

Sanders, Lisanne and De Waegenaere, Anja M.B. and Nijman, Theo E., When can Insurers Offer Products that Dominate Delayed Old-Age Pension Benefit Claiming? (April 1, 2010). Netspar Discussion Paper No. 04/2010-011. Available at SSRN: https://ssrn.com/abstract=1625749 or http://dx.doi.org/10.2139/ssrn.1625749

Lisanne Sanders (Contact Author)

Tilburg University - CentER for Economic Research ( email )

Tilburg, 5000 LE
Netherlands

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Anja M.B. De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Theo E. Nijman

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2342 (Phone)
+31 13 466 3280 (Fax)

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