4th International Research Conference

Annuities provide insurance against outliving one’s wealth. Previous studies have indicated that, for many households, the value of the longevity insurance should outweigh the actuarial unfairness of prices in the voluntary annuity market. Nonetheless, voluntary annuitization rates are extremely low. The proportion of the financial assets of elderly households that is compulsorily annuitized is projected to fall considerably in coming decades. Those households that would prefer not to annuitize, even on the relatively favorable terms made possible by compulsion, will be better off than before. Adverse selection in the voluntary annuity market will result in the remaining households being worse off. Previous research on the value of annuitization has compared annuitization at age 65 with the alternative of never annuitizing. In practice, the choice is between exercising the annuitization option this period, and delaying the decision until next period. Using numerical optimization techniques, we conclude that depending on the parameter values selected, it is optimal for couples to delay annuitization until they are aged 74 to 89, and in some cases never to annuitize. It is usually optimal for single men and women to annuitize substantially younger, at around 65 and 70 respectively. Using data from the Asset and Health Dynamics Among the Oldest Old and Health and Retirement Study panels, we show that the failure of older retired households to annuitize can be attributed to the exceptionally high proportion of the wealth of these older cohorts that is pre-annuitized. On the other hand, the younger cohorts have smaller proportions of pre-annuitized wealth and we project increasing demand for annuitization as successive cohorts age. JEL Codes: D91, E21, G11, J14, J26 We would like to thank John Ameriks, Marjorie Flavin, Leora Friedberg, Kathleen McGarry, Sara Rix, participants at the Society of Actuaries 2002 Annual Meeting and colleagues at the International Longevity Center for very helpful comments. We are grateful to Ben Tarlow and Gregor Franz for research assistance. The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) to the Center for Retirement Research at Boston College. The opinions and conclusions are solely those of the authors and should not be construed as representing the opinions or policy of the SSA or any agency of the Federal Government. Corresponding author: Anthony Webb, International Longevity Center-USA, 60 E. 86th Street, New York, NY 10028, [email protected].