The Role of Longevity Annuities in Different Socioeconomic Classes: A Canadian Case Study

Abstract

A longevity annuity is a deeply deferred annuity which begins payments very late in life. By transferring some of the risk of outliving retirement savings at advanced ages to annuity providers, longevity annuities provide retirees with enhanced later-life financial security. This paper aims to investigate the impact of longevity annuity provision on retirement income planning for Canadians, on the basis of the tax rules and retirement system in Canada. The research objective is achieved through a dynamic life cycle framework that is developed to study the change in saving and consumption patterns resulting from the provision of longevity annuities. To determine the optimal choices, we propose a modified general endogenous grid method (GEGM), which addresses the non-differentiability problem arising from realistic tax rules and retirement system. The proposed life cycle framework and modified GEGM are further applied to examine how individuals in different socioeconomic classes may utilize longevity annuities.

Keywords: Longevity annuity, Stochastic mortality, Retirement, Life cycle, Endogenous grid method