A Knightian Analysis of the Viability of a Lifetime Annuity Market in Australia

Abstract

The ageing of Australia’s population and the maturing of the Australian Superannuation Guarantee Levy system means that there will be greater amounts of funds available to retirees to fund their retirement income needs. A guaranteed lifetime annuity is often cited as the ideal solution for the majority of retirees to convert their lump sums at retirement to a lifetime income. This paper considers issues relating to the creation of a viable guaranteed lifetime annuity market from both the buyer’s and the seller’s perspective within a Knightian risk management framework and concludes the inherent risks for buyers and sellers are just too high. The paper concludes that without some government intervention in the market, it is unlikely a sustainable lifetime annuity market will develop in Australia.

Keywords: Lifetime Annuity, Longevity risk, Investment risk, Knightian analysis

JEL Classification: G1, G2