Optimal Annuitization with Stochastic Mortality Probabilities
The conventional wisdom dating back to Yaari (1965) is that households without a bequest motive should fully annuitize their investments. Numerous market frictions do not break this sharp result. We modify the Yaari framework by allowing a household's mortality risk itself to be stochastic. Annuities still help to hedge longevity risk, but they are now subject to valuation risk. Valuation risk is a powerful gateway mechanism for numerous frictions to reduce annuity demand, even without ad hoc "liquidity constraints." We find that most households should not annuitize any wealth. The optimal level of aggregate net annuity holdings is likely even negative.
-
-
Copy CitationFelix Reichling and Kent Smetters, "Optimal Annuitization with Stochastic Mortality Probabilities," NBER Working Paper 19211 (2013), https://doi.org/10.3386/w19211.Download Citation
Published Versions
Reichling, Felix, and Kent Smetters. 2015. "Optimal Annuitization with Stochastic Mortality and Correlated Medical Costs." American Economic Review, 105(11): 3273-3320.
Related
Working Groups
More from the NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Health, and the Bulletin on Entrepreneurship — as well as online conference reports, video lectures, and interviews.
