Redistribution and Insurance: Mandatory Annuitization with Mortality Heterogeneity

Center for Retirement Research at Boston College, 2001

Posted: 9 Mar 2010

See all articles by Jeffrey R. Brown

Jeffrey R. Brown

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

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Date Written: April 1, 2001

Abstract

This paper examines the distributional implications of mandatory longevity insurance when there is mortality heterogeneity in the population. Previous research has demonstrated the significant financial redistribution that occurs under alternative annuity programs in the presence of differential mortality across groups. This paper embeds that analysis into a life cycle framework that allows for an examination of distributional effects on a utility-adjusted basis. It finds that the degree of redistribution that occurs from the introduction of a mandatory annuity program is substantially lower on a utility-adjusted basis than when evaluated on a purely financial basis. Complete annuitization is shown to be optimal even when annuities are not actuarially fair for each individual, so long as there are no administrative costs and no bequest motives. In the presence of bequest motives, mandatory complete annuitization can make some individuals worse off. Even with strong bequest motives, however, welfare can be substantially enhanced by annuities by allowing individuals to only partially annuitize their wealth. Finally, life annuities with "period certain" bequest options are shown to be inferior to partial annuitization, while having identical distributional effects.

Suggested Citation

Brown, Jeffrey R., Redistribution and Insurance: Mandatory Annuitization with Mortality Heterogeneity (April 1, 2001). Center for Retirement Research at Boston College, 2001, Available at SSRN: https://ssrn.com/abstract=1127824

Jeffrey R. Brown (Contact Author)

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