Annuities and Individual Welfare

Davidoff, Thomas; Brown, Jeffrey R.; Diamond, Peter A.

doi:10.2139/ssrn.405621

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Annuities and Individual Welfare

MIT Department of Economics Working Paper No. 03-15

CRR Working Paper No. 2003-11

AFA 2005 Philadelphia Meetings

31 Pages Posted: 28 Dec 2004

See all articles by Thomas Davidoff

Thomas Davidoff

University of British Columbia (UBC) - Sauder School of Business

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); University of Illinois College of Law; University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA); University of Illinois at Urbana-Champaign - Department of Economics

Peter A. Diamond

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

There are 2 versions of this paper

Date Written: March 17, 2005

Abstract

Advancing annuity demand theory, we present sufficient conditions for the optimality of full annuitization under market completeness that are substantially less restrictive than those used by Yaari (1965). We examine demand with market incompleteness, finding that positive annuitization remains optimal widely, but complete annuitization does not. How uninsured medical expenses affect demand for illiquid annuities depends critically on the timing of the risk. A new set of calculations with optimal consumption trajectories very different from available annuity income streams still shows a preference for considerable annuitization, suggesting that limited annuity purchases are plausibly due to psychological or behavioral biases.

Keywords: Annuities, annuitization, Social Security, pensions, longevity risk, insurance, standard-of-living, habit

JEL Classification: D11, D91, E21, H55, J14, J26

Suggested Citation: Suggested Citation

Davidoff, Thomas and Brown, Jeffrey R. and Diamond, Peter A., Annuities and Individual Welfare (March 17, 2005). MIT Department of Economics Working Paper No. 03-15, CRR Working Paper No. 2003-11, AFA 2005 Philadelphia Meetings, Available at SSRN: https://ssrn.com/abstract=405621 or http://dx.doi.org/10.2139/ssrn.405621