Life Cycle Annuity Valuation
NBER Working Paper No. 1511
In this paper, we argue that actuarial valuation of annuity benefit streams is theoretically inconsistent with the assumption of pure lifecycle motives. Instead, we show that the simple discounted value of future benefits (ignoring the possibility of death) is often a good approximation to the relevant concept of value. This observation motivates a re-examination of existing empirical evidence concerning the effects of Social Security on personal savings, retirement, and the distribution of wealth, as well as the proper computation of age-wealth profiles. The conceptual points raised here are also relevant for evaluating the relative merits of wage and consumption taxes. In each case,we argue that the use of simple, rather than actuarial discounting of survival-contingent income streams dramatically alters the conclusions of previous studies.
Published: Bernheim, B. Douglas. "The Economic Effects of Social Security: Toward a Reconciliation of Theory and Measurement," Journal of Public Economics, Vol. 33, no. 3, pp. 273-304, 1987.