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

Jan Walliser

Scandinavian Journal of Economics, 2000, vol. 102, issue 3, 373-393

Abstract: The observation that few Americans purchase life annuities has often been attributed to adverse selection. A still unanswered question is whether observable price increases caused by adverse selection can be generated endogenously in a life cycle model. This paper calibrates a pure life cycle model for a characteristic US cohort and reproduces three stylized facts. Adverse selection increases annuity prices by 7–10 percent; the cost of adverse selection rises with the age of the annuitant; and the cost is smaller for females than for males. Social security privatization could reduce annuity prices by between 2 and 3 percent.

Date: 2000
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