Drawing Down Retirement Financial Savings: A Welfare Analysis using French data

Abstract

In recent decades, most countries have responded to increased longevity, population ageing, and low market returns with systemic and/or gradual parametric pension reforms. The trend towards individual accounts in public and private funded pension schemes augmented the importance of studying the decumulation phase of pensions. This paper uses a simulation design to empirically investigate the individual welfare generated from alternative annuitization and self-managed fixed, variable and hybrid drawdown strategies. A time-separable utility function is used to represent an individual's preferences towards consumption and bequest, risk aversion, and intertemporal discounting and to quantitively assess the range of retirement outcomes from competing decumulation designs. The setting comprises a stochastic mortality and investment risk framework calibrated to French interest rate, stock market, and mortality data from 2010 to 2019. The results show that self-managed variable decumulation strategies may generate higher income at the expense of high risk-taking, more volatile income streams, and no longevity insurance. Annuitization strategies involving longevity-linked life annuities and hybrid solutions provide higher expected lifetime utility at the expense of bequest motives.CCS CONCEPTS • Modeling and simulation • Continuous mathematics • Law, social and behavioral sciences