The Cost of Annuities: Implications for Saving Behavior and Bequests

Benjamin M. Friedman and Mark Warshawsky

No 1682, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The fact that most eldealy individuals in the United States choose to maintain a flat age-wealth profile, rather than buy individual life annuities, stands in contrast to central implications of the standard life-cycle model of consumption-saving behavior. The analysis in this paper lends support to an explanation for this phenomenon based either on the cost of annuities, importantly including the element of that cost due to adverse selection, or on the interaction of that cost and an intentional bequest motive. Expected yields offered on individual life annuities in the United States are lower by some 4-6%, or 2 1/2-4 1/2% after allowing for adverse selection, than yields on alternative long-term fixed-income investments. Simulations of an extended model of life-cycle saving and portfolio behavior, allowing explicitly for uncertain lifetimes and Social Security, show that yield differentials in this range can account for the observed behavior, even in the absence of a bequest motive, during the early years of retirement. By contrast, at older ages the combination of yield differentials in this range and a positive bequest motive is necessary to do so.

Date: 1985-08
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (124)

Published as The Quarterly Journal of Economics, Vol. CV, Issue 1, pp. 135-154,(February 1990).

Downloads: (external link)
http://www.nber.org/papers/w1682.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:1682

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w1682

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().