Collective Annuities and Redistribution. Collective Annuities and Redistribution

In a number of countries one observes a steady decline in defined benefits pensions schemes, public or private, funded or unfunded, and a simultaneous expansion of defined contributions plans. One of the consequences of this trend is to deprive individuals at the time of their retirement from the benefit of collective annuitization. Collective annuities can be distinguished from individual ones in two ways. First, they tend to be cheaper because of their scale and because of inefficiencies in private annuity markets. Second they redistribute resources from short-lived to long-lived individuals. Our paper studies the role of collective annuities. Both their redistributive incidence and efficiency aspects are accounted for. We assume that lifetime is uncertain and that there is a positive correlation between longevity and earnings. Collective annuitization (in part or in total) can be imposed on private savings or it can be “bundled” with a redistributive pension scheme. We show that the case for applying collective annuitization to private savings is weak. The case is stronger when collective annuities are associated with redistributive pensions. However, even in that case, collective annuitization may mitigate the redistributive benefits associated with the pension system.