Adverse Selection in the Annuity Market and the Role for Social Security

Roozbeh Hosseini

Journal of Political Economy, 2015, vol. 123, issue 4, 941 - 984

Abstract: I study the role of social security in providing insurance when there is adverse selection in the annuity market. I calculate welfare gain from mandatory annuitization in the social security system relative to a laissez-faire benchmark, using a model in which individuals have private information about their mortality. I estimate large heterogeneity in mortality using the Health and Retirement Study. Despite that, I find small welfare gain from mandatory annuitization. Social security has a large effect on annuity prices because it crowds out demand by high-mortality individuals. Welfare gain would have been significantly larger in the absence of this effect.

Date: 2015
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Working Paper: Adverse Selection in the Annuity Market and the Role for Social Security (2008)
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