New Evidence on the Money's Worth of Individual Annuities

47 Pages Posted: 20 Jul 2000 Last revised: 21 Apr 2008

See all articles by Olivia S. Mitchell

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

James M. Poterba

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

Mark J. Warshawsky

Towers Watson; Mercatus Center at George Mason University

Date Written: April 1997

Abstract

This paper presents new information on the expected present discounted value of payouts on individual life annuities. The annuity we examine is the single premium immediate life annuity, an insurance product that pays out a nominal level sum as long as the covered person lives, in exchange for an initial lump-sum premium. This annuity offers protection against the risk of someone outliving his saving, given uncertainty about longevity. For reasonable estimates of behavioral parameters, we calculate that individual annuities are currently priced so that retirees without bequest motives should find these policies of substantial value in configuring their portfolios to smooth retirement consumption. We also find that the expected present discounted value of payouts, relative to the initial cost of the annuity, has increased over the last decade. These findings bear on the policy debate regarding the role of individual choice and self-reliance in retirement planning.

Suggested Citation

Mitchell, Olivia S. and Poterba, James M. and Warshawsky, Mark J., New Evidence on the Money's Worth of Individual Annuities (April 1997). NBER Working Paper No. w6002. Available at SSRN: https://ssrn.com/abstract=226413

Olivia S. Mitchell (Contact Author)

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James M. Poterba

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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

50 Memorial Drive
E52-350
Cambridge, MA 02142
United States
617-253-6673 (Phone)
617-253-1330 (Fax)

Mark J. Warshawsky

Towers Watson ( email )

Arlington, VA
United States

Mercatus Center at George Mason University

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

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