Optimal Annuitization with Stochastic Mortality Probabilities

Reichling, Felix; Smetters, Kent

doi:10.3386/w19211

Cited by 20 publications

(17 citation statements)

References 38 publications

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“…Reichling and Smetters (2013) use Robinson (1996) estimates of health, as distinct from care status, transitions in an analysis of optimal annuity purchase. Table 1 summarizes key data sources and findings from each of the above papers.…”

Section: Previous Researchmentioning

confidence: 99%

New Evidence on the Risk of Requiring Long-Term Care

et al. 2014

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Long-term care is one of the major expenses faced by many older Americans. Yet, we have only limited information about the risk of needing long-term care and the expected duration of care. The expectations of needing to receive home health care, live in an assisted living facility or live in a nursing home are essential inputs into models of optimal post-retirement saving and long-term care insurance purchase. Previous research has used the Robinson (1996) transition matrix, based on National Long Term Care Survey (NLTCS) data for 1982-89. TheRobinson model predicts that men and women aged 65 have a 27 and 44 percent chance, respectively, of ever needing nursing home care. Recent evidence suggests that those earlier estimates may be extremely misleading in important dimensions. Using Health and Retirement Study (HRS) data from 1992-2010, Hurd, Michaud, and Rohwedder (2013 estimate that men and women aged 50 have a 50 and 65 percent chance, respectively, of ever needing care. But, they also estimate shorter average durations of care, resulting, as we show, from a greater chance of returning to the community, conditional on admission. If nursing home care is a highprobability but relatively low-cost occurrence, models that treat it as a lower-probability, highcost occurrence may overstate the value of insurance.We update and modify the Robinson model using more recent data from both the NLTCS and the HRS. We show that the low lifetime utilization rates and high conditional mean durations of stay in the Robinson model are artifacts of specific features of the statistical model that was fitted to the data. We also show that impairment and most use of care by age has declined and that the 2004 NLTCS and the 1996-2010 HRS yield similar cross-sectional patterns of care use. We revise and update the care transition model, and we show that use of the new transition matrix substantially reduces simulated values of willingness-to-pay in an optimal longterm care insurance model.

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Section: Previous Researchmentioning

confidence: 99%

New Evidence on the Risk of Requiring Long-Term Care

et al. 2014

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“…Commercial annuity prices are also loaded to cover the insurer's operational costs. For example, Reichling and Smetters () state that in the United States, yearly management fees for a typical annuity range from 0.80 to 2.0 percent of underlying assets, not including any initial commission charges. Under the SM bond scheme, the government will also incur operational costs.…”

Section: S Bonds Versus Private Sector Productsmentioning

confidence: 99%

“…Those in poor health (or with shorter life expectancies than the average annuitant) may be especially reluctant to buy lifetime annuities, since the value of benefits received is likely to be lower than the cost of the annuity. Economic models allowing for health uncertainties indicate that this might explain the low level of demand for annuities (Reichling and Smetters, ). Social security interactions. The retiree may prefer to spend money maintaining a better standard of living in the early years of retirement, and then rely on government provided safety‐net benefits to cover income needs at advanced ages.…”

Section: Introductionmentioning

confidence: 99%

SM Bonds—A New Product for Managing Longevity Risk

Jong¹,

Ferris²

2017

J of Risk & Insurance

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A new type of retirement bond is proposed called an SM bond. SM bonds are long dated government bonds divisible into two parts: a survivorship (S) part and a mortality (M) part. Each SM bond is associated with a particular age. SM bonds associated with a particular age are only purchasable by (originators) of that age. The SM bond is then splittable into an S and M component. The S part must be retained by the originator, who receives the face value of the bond if he/she is alive at maturity. For originators who die prior to the maturity date, the maturity value of the SM bond is assigned to a mortality pool. The holder of the M part of the bond receives the annual bond coupon, and at maturity a pro rata share of the mortality pool. M bonds are tradable: holders can sell their M bonds to anyone, at any time. It is envisaged different age bonds are issued every year for ages say 30–64 each with say a 35‐year term. The market will be regularly informed about the mortality experience, and the market price of the M bonds will vary over time to reflect that experience.

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“…For example, Lockwood (2012) shows that the bequest motive required to render annuitization unappealing is of a size that may be empirically relevant. Recently, Reichling and Smetters (2013) make the important point that when individuals experience shocks to their mortality expectations, this provides a pathway through which other forms of market incompleteness (such as the inability to insure against certain types of health shocks) can make annuities less attractive. Although some have interpreted this finding as suggesting that annuities should not necessarily play a greater role in retirement portfolios, the more nuanced conclusion is that the ability of annuities to increase well-being is dependent upon an individual's ability to insure against other shocks as well.…”

Section: Narrow Versus Broad Framing Of Retirement Policymentioning

confidence: 99%

Income as the Outcome: How to Broaden the Narrow Framing of U.S. Retirement Policy

Brown¹

2014

Risk Manage Insurance Review

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This article provides a brief review of behavioral economics research on annuitization. It applies the lessons learned from this literature to examine how public policy toward defined contribution plans has narrowly framed the conversation about retirement in a manner that may discourage the provision of lifetime income. It then discusses a number of policy changes that could be made to reframe the conversation to focus on retirement income security rather than wealth accumulation.

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Optimal Annuitization with Stochastic Mortality Probabilities

Abstract: NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Cited by 20 publications

References 38 publications

New Evidence on the Risk of Requiring Long-Term Care

New Evidence on the Risk of Requiring Long-Term Care

SM Bonds—A New Product for Managing Longevity Risk

Income as the Outcome: How to Broaden the Narrow Framing of U.S. Retirement Policy

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