Adverse Selection in the Annuities Market and the Impact of Privatizing Social Security

Walliser, Jan

doi:10.1111/1467-9442.00206

“…Other papers closely related to ours are Abel (1986), Walliser (2000), and Palmon and Spivak (2007). All three find that the introduction of social annuities accentuates the problem of adverse selection in the private annuity market.…”

Section: Introductionsupporting

confidence: 58%

“…In contrast to our work, however, both Walliser (2000) and Palmon and Spivak (2007) focus on the features of private annuity markets in isolation and do not take general equilibrium effects into account. Moreover, the latter fail to specify what happens to accidental bequests in the absence of annuities and therefore incorrectly conclude that private annuities are always welfare improving.…”

Section: Introductionmentioning

confidence: 84%

“…However, their result relies heavily on the assumption that customers can buy only one insurance contract such that the insurer sets both price and quantity. They admit themselves that this may be an objectionable assumption in some cases, and Walliser (2000) argues that it indeed does not apply to the annuity market. First of all, monitoring the receipts of annuity payments from other annuity firms would be very difficult.…”

Section: Asymmetric Information Equilibriummentioning

confidence: 99%

“…As noted by Walliser (2000), it can alternatively be interpreted as a Nash equilibrium among annuity firms in which each firm that deviates from the zero-profit price incurs a loss. The lifetime budget constraint for annuitants is given by:…”

Section: Asymmetric Information Equilibriummentioning

confidence: 99%

“…In this context, the introduction of a mandatory (demographically fair 1 ) social security system further decreases the return on annuities in the steady state. Walliser (2000) builds on the work of Abel (1986), but calibrates his model with 75 instead of only 2 periods. The paper investigates the effects of pay-as-you-go social security benefits on private annuity demand and shows that privatization (i.e.…”

Section: Introductionmentioning

confidence: 99%

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Adverse Selection in Private Annuity Markets and the Role of Mandatory Social Annuitization

Heijdra

¹

,

Reijnders

²

2012

De Economist

4

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We study the effects on the macroeconomic equilibrium, the wealth distribution, and welfare of adverse selection in private annuity markets in a closed economy inhabited by overlapping generations of heterogeneous agents who are distinguished by their health status. If an agent's health type is private information there will be a pooling equilibrium in the private annuity market. We also study the implications for the macro-economy and welfare of a social security system with mandatory contributions that are constant across health types. These social annuities are immune to adverse selection and therefore offer a higher rate of return than private annuities do. However, they have a negative effect on the steady-state capital intensity and welfare. The positive effect of a fair pooled rate of return on a fixed part of savings and a higher return on capital in equilibrium is outweighed by the negative consequences of increased adverse selection in the private annuity market and a lower wage rate.

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Optimum taxation of life annuities

Brunner¹,

Pech²

2007

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The market for private life annuities is characterised by adverse selection, that is, contracts offer lower than fair payoffs to individuals with low life expectancy. Moreover, life expectancy and income have been found to be positively correlated. The paper shows that a linear tax on annuity payoffs, which raises more revenues from long-living individuals than from short-living, represents an appropriate instrument for redistribution, in addition to an optimally designed labour income tax. Further, we find that a nonlinear tax on annuity payoffs can be directly employed to correct the distortion of the rate of return caused by asymmetric information. These results are contrasted with theoretical findings concerning the role of a tax on capital income. Terms of use: Documents in EconStor mayJEL Code: H2, G2.

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Economic Growth and Longevity Risk with Adverse Selection

Heijdra

¹

,

Reijnders

²

2012

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We study a closed economy featuring heterogeneous agents and exhibiting endogenous economic growth due to interfirm external effects. Individual agents differ in terms of their mortality profile. At birth, nature assigns a health status to each agent. Health type is private information and annuity firms can only observe an agent's age. In the presence of longevity risk, agents want to annuitize their wealth conform the classic result by Yaari (1965). In the first-best case with perfect annuities, the market would feature a separating equilibrium (SE) in which each health type obtains an actuarially fair perfect insurance. In the SE all agents are savers throughout their lives. The informational asymmetry precludes the attainment of the first-best equilibrium, however, as healthy individuals have a strong incentive to misrepresent their type by claiming to be unhealthy. Using the equilibrium concept of Pauly (1974) and Abel (1986), we prove the existence of a second-best pooling equilibrium (PE) in which individuals of all types annuitize at a common pooling rate. As the unhealthy get close to their maximum attainable age, the pooling rate prompts such individuals to become net borrowers. But borrowing would reveal their health status, so the best the unhealthy can do is to impose a borrowing constraint on themselves during their autumn years. Using a plausibly calibrated version of the model we find that the growth-and welfare effects of PE versus SE are rather small, whilst those of PE versus no annuities at all (NAE) are rather large. An imperfect insurance is better than no insurance at all, both at the microeconomic and at the macroeconomic level. Terms of use: Documents inJEL-Code: D52, D91, E10, J20.

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Adverse Selection in the Annuities Market and the Impact of Privatizing Social Security

Cited by 52 publications

References 23 publications

Adverse Selection in Private Annuity Markets and the Role of Mandatory Social Annuitization

Adverse Selection in Private Annuity Markets and the Role of Mandatory Social Annuitization

Optimum taxation of life annuities

Economic Growth and Longevity Risk with Adverse Selection

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