A TRAGEDY OF ANNUITIZATION? LONGEVITY INSURANCE IN GENERAL EQUILIBRIUM

Ben Heijdra (), Jochen Mierau and S. M. Reijnders

Macroeconomic Dynamics, 2014, vol. 18, issue 7, 1607-1634

Abstract: We study the microeconomic and macroeconomic effects of longevity insurance. Using a tractable discrete-time overlapping-generations model of a closed economy we first study different types of government redistribution of accidental bequests in general equilibrium. Individuals face longevity risk, as there is a positive probability of passing away before the retirement period. We find nonpathological cases where it is better for long-run welfare to waste accidental bequests than to give them to the elderly. Next we study the introduction of a perfectly competitive life insurance market offering actuarially fair annuities. There exists a tragedy of annuitization: although full annuitization of assets is privately optimal, it is not socially beneficial, because of adverse general equilibrium repercussions.

Date: 2014
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