Annuitisation and Cross-Subsidies in a Two-Tiered Retirement Saving System

Annals of Actuarial Science, Volume 8, Issue 02, September 2014, pp 234-252

Posted: 5 Jan 2014 Last revised: 28 Sep 2015

See all articles by Benjamin Avanzi

Benjamin Avanzi

UNSW Australia Business School, School of Risk and Actuarial Studies

Sachi Purcal

Macquarie University - Department of Actuarial Studies; Financial Research Network (FIRN); Macquarie University, Macquarie Business School

Date Written: January 4, 2014

Abstract

We develop a generalisation of the World Bank (1994) model of forced saving for retirement. This broader model consists of two tiers of second pillar savings – mandated and non-mandated (voluntary). Furthermore, the government can set two types of guarantees on the first (mandated) tier – investment returns and annuity prices – leading to possible cross-subsidisation between the tiers. This has the potential to induce social redistribution, foster a liquid private market for life annuities, as well as obviate some of the investment risk and annuity price risk that retirees face.

We formulate a quantitative model of financial flows within such a system, which explains the mechanism by which cross-subsidisation occurs. Based on this analysis, a taxonomy of two-tiered retirement systems is presented, that is based on the choices that the government makes.

Keywords: retirement savings, pensions, regulation, annuitisation

JEL Classification: J26, D81, D91, E21, G23, H55

Suggested Citation

Avanzi, Benjamin and Purcal, Sachi, Annuitisation and Cross-Subsidies in a Two-Tiered Retirement Saving System (January 4, 2014). Annals of Actuarial Science, Volume 8, Issue 02, September 2014, pp 234-252. Available at SSRN: https://ssrn.com/abstract=2374614

Benjamin Avanzi (Contact Author)

UNSW Australia Business School, School of Risk and Actuarial Studies ( email )

UNSW Sydney, NSW 2052
Australia

Sachi Purcal

Macquarie University - Department of Actuarial Studies ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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