Adverse Selection in the Annuity Market and the Role for Social Security
|
|
- Preston Godfrey Bradford
- 5 years ago
- Views:
Transcription
1 Adverse Selection in the Annuity Market and the Role for Social Security Roozbeh Hosseini Arizona State University Quantitative Society for Pensions and Saving 2011 Summer Workshop
2 Social Security The largest government program in the U.S. Many debates over reform/privatization Central question to this debate - What useful aspects are lost (that market can t replicate)? This paper talks about one - Mandatory annuity insurance Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 2 / 61
3 Mandatory annuity insurance Is a key feature in almost all social security systems Can be desirable when there is adverse selection Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 3 / 61
4 Why is it desirable? If there is private information about mortality High mortality types - Annuitize smaller portion of their wealth Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 4 / 61
5 Why is it desirable? If there is private information about mortality High mortality types - Annuitize smaller portion of their wealth Insurers - Recognize this self-selection - Offer high prices that reflect mortality rate of long-lived Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 4 / 61
6 Why is it desirable? If there is private information about mortality High mortality types - Annuitize smaller portion of their wealth Insurers - Recognize this self-selection - Offer high prices that reflect mortality rate of long-lived A mandatory annuity insurance Forces everyone (including high mortality) to join Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 4 / 61
7 Why is it desirable? If there is private information about mortality High mortality types - Annuitize smaller portion of their wealth Insurers - Recognize this self-selection - Offer high prices that reflect mortality rate of long-lived A mandatory annuity insurance Forces everyone (including high mortality) to join Thereby Provides insurance at higher (implicit) rate of return Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 4 / 61
8 Question We know Social security has mandatory annuitization It can be a desirable feature Private markets cannot replicate it Question How important is it quantitatively? Feldstein s quote Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 5 / 61
9 This paper Develops model of annuity market with adverse selection Heterogeneous mortality Private information Market structure: linear contracts Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 6 / 61
10 This paper Develops model of annuity market with adverse selection Heterogeneous mortality Private information Market structure: linear contracts - Annuities: financial contracts, difficult to observe/monitor - Lack of observability Contracts are non-exclusive - Little evidence on screening in the market Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 6 / 61
11 This paper Develops model of annuity market with adverse selection Heterogeneous mortality Private information Market structure: linear contracts Calibrates the model to match US facts Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 6 / 61
12 This paper Develops model of annuity market with adverse selection Heterogeneous mortality Private information Market structure: linear contracts Calibrates the model to match US facts Compares welfare between three benchmarks Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 6 / 61
13 Three benchmarks Private annuity markets No social security Annuity is available only through private markets Current U.S. system Stylized features of U.S. social security Private markets Ex ante efficient allocations Solution to utilitarian planner s problem Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 7 / 61
14 Overall ex ante gains If welfare is evaluated ex ante i.e., before mortality type is realized, then... Welfare gains between - Private annuity markets and current US system - Current US system and ex ante efficient Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 8 / 61
15 Overall ex ante gains If welfare is evaluated ex ante i.e., before mortality type is realized, then... Welfare gains between - Private annuity markets and current US system 0.27% - Current US system and ex ante efficient Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 8 / 61
16 Overall ex ante gains If welfare is evaluated ex ante i.e., before mortality type is realized, then... Welfare gains between - Private annuity markets and current US system 0.27% - Current US system and ex ante efficient 0.64% Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 8 / 61
17 Overall ex ante gains If welfare is evaluated ex ante i.e., before mortality type is realized, then... Welfare gains between - Private annuity markets and current US system 0.27% - Current US system and ex ante efficient 0.64% 0.91% Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 8 / 61
18 Overall ex ante gains If welfare is evaluated ex ante i.e., before mortality type is realized, then... Welfare gains between - Private annuity markets and current US system 0.27% - Current US system and ex ante efficient 0.64% 0.91% Who loses and who gains ex post, i.e., after mortality type is realized? autarky Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 8 / 61
19 Social Security has two effects 1. Transfers from high mortality types to low mortality types About 9% suffer losses: high mortality - low survival About 91% percent gain: low mortality - high survival Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 9 / 61
20 Social Security has two effects 1. Transfers from high mortality types to low mortality types About 9% suffer losses: high mortality - low survival About 91% percent gain: low mortality - high survival 2. Crowds out high mortality type in the annuity markert These are good risk types Market pool is populated by bad risk types high prices This price effect has negative welfare impact of 0.29 percent Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 9 / 61
21 Social Security has two effects 1. Transfers from high mortality types to low mortality types About 9% suffer losses: high mortality - low survival About 91% percent gain: low mortality - high survival 2. Crowds out high mortality type in the annuity markert These are good risk types Market pool is populated by bad risk types high prices This price effect has negative welfare impact of 0.29 percent Can we use laternative policy to minimize this effect? Yes! Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 9 / 61
22 Related literature Theoretical models: Abel(1986); Eichenbaum and Peled(1987); Eckstein, Eichenbaum and Peled(1985) Welfare enhancing role for mandatory annuitization Detecting AS: Finkelstein and Poterba(2002,2004,2006); Mitchell, Poterba,Warshawsky and Brown(1999); Friedman and Warshawsky (1990) Evidence for adverse selection in the annuity market Measure the value of access to actuarially fair annuity Estimate welfare cost of asymmetric information: Einav, Finkelstein and Shrimpf(2010) preference heterogeneity as well as risk heterogeneity Benefits of annuitization in social security: Hubbard and Judd (1987) Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 10 / 61
23 Model Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 11 / 61
24 Environment: information Individuals have private type θ known at date zero θ indexes their mortality It determines their individual survival probabilities Distribution at date zero: G 0 (θ) The only heterogeneity is in θ The only risk is time of death Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 12 / 61
25 Environment: preferences Everyone lives between 0 and T and has preferences Where T β t P t (θ)[u(c t ) + β(1 x t+1 (θ))ξu(b t )] t=0 Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 13 / 61
26 Environment: preferences Everyone lives between 0 and T and has preferences Where T β t P t (θ)[u(c t ) + β(1 x t+1 (θ))ξu(b t )] t=0 P t (θ) : probability that type θ is alive at age t Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 13 / 61
27 Environment: preferences Everyone lives between 0 and T and has preferences Where T β t P t (θ)[u(c t ) + β(1 x t+1 (θ))ξu(b t )] t=0 P t (θ) : probability that type θ is alive at age t x t+1 (θ) : One period conditional survival x t+1 (θ) = P t+1(θ) P t(θ) Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 13 / 61
28 Environment: preferences Everyone lives between 0 and T and has preferences Where T β t P t (θ)[u(c t ) + β(1 x t+1 (θ))ξu(b t )] t=0 P t (θ) : probability that type θ is alive at age t x t+1 (θ) : One period conditional survival x t+1 (θ) = P t+1(θ) P t(θ) ξ : weight on bequest, b t Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 13 / 61
29 Technology Inelastic labor supply up to age J < T n units of labor produces wn units of consumption good Saving technology R = 1 β Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 14 / 61
30 Annuity contracts Can be purchased at age J (last period before retirement) Makes survival contingent payment starting age J + 1 Unit cost of annuity is q Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 15 / 61
31 Individual s problem subject to max c t,k t+1,a 0 T β t P t (θ)[u(c t ) + β(1 x t+1 (θ))ξu(rk t+1 )] t=0 c t + k t+1 = Rk t + w(1 τ) for t < J c t + k t+1 + qa = Rk t + w(1 τ) for t = J c t + k t+1 = Rk t + a + z for t > J Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 16 / 61
32 Insurers Insurers do not observe individual demand for each type θ However, they know the demand function a(θ, q) They anticipate the fraction of total sales, purchased by θ df (θ) = a(θ; q)dg J(θ) a(θ; q)dgj (θ) Insurers use F (θ) to evaluate their profit Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 17 / 61
33 Annuity insurers problem max y 0 ( qy y T t=j+1 P t (θ) P J (θ) 1 R s t ) df (θ) F (θ) is anticipated distribution of pay-outs - Determines fraction of y sold to type θ - Taken as given by the insurer Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 18 / 61
34 Government Budget Constraint τw ( J t=0 ) P t (θ) dg R t 0 (θ) = z ( T t=j+1 ) P t (θ) dg R t 0 (θ) Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 19 / 61
35 Equilibrium Households and firms optimize + markets clear F (θ) is consistent with individual decisions df (θ) = a(θ)dg J(θ) a(θ)dgj (θ) Government budget constraint Skip Example Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 20 / 61
36 Properties of Equilibrium: Two period case Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 21 / 61
37 Two lessons Use two period example to illustrate two properties 1 In this environment there is adverse selection - Equilibrium price is higher than aggregate risk 2 Increasing social security tax and benefit - Crowds out annuity market - Increases equilibrium price of annuity Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 22 / 61
38 A two period example subject to max u(c 1 ) + P u(c 2 ) c 1 + qa w(1 τ) c 2 a + z P is probability of survival (with distribution G(P )) Aggregate risk of survival is P dg(p ) The goal is to show in equilibrium q > P dg(p ) Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 23 / 61
39 Adverse selection Consider the zero profit condition q a(p ; q)dg(p ) = P a(p ; q)dg(p ) }{{}}{{} Total sale Total expected payment Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 24 / 61
40 Adverse selection Consider the zero profit condition q = P a(p ; q)dg(p ) a(p ; q)dg(p ) Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 24 / 61
41 Adverse selection Consider the zero profit condition a(p ; q)dg(p ) q = P a(p ; q)dg(p ) Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 24 / 61
42 Adverse selection Consider the zero profit condition a(p ; q)dg(p ) q = P a(p ; q)dg(p ) }{{} df (P ) F(P) - Insurers use F (P ) to evaluate risk G(P) 0 P Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 24 / 61
43 Adverse selection Consider the zero profit condition a(p ; q)dg(p ) q = P a(p ; q)dg(p ) }{{} df (P ) F(P) - Insurers use F (P ) to evaluate risk G(P) - a(p ; q) is increasing in P F (P ) is more skewed relative to G(P ) 0 P Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 24 / 61
44 Adverse selection Consider the zero profit condition q = P df (P ) > P dg(p ) F(P) - Insurers use F (P ) to evaluate risk G(P) - a(p ; q) is increasing in P F (P ) is more skewed relative to G(P ) 0 P Therefore, equilibrium price is higher than aggregate risk Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 24 / 61
45 Effect of increasing social security SS benefit is a substitute for annuity increasing SS reduces demand for annuity Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 25 / 61
46 Effect of increasing social security SS benefit is a substitute for annuity increasing SS reduces demand for annuity Annuity Demand by Type Low SS Tax - a(p ; q) is increasing in P 0 Probability of Survival 1 Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 25 / 61
47 Effect of increasing social security SS benefit is a substitute for annuity increasing SS reduces demand for annuity Annuity Demand by Type Low SS Tax High SS Tax - a(p ; q) is increasing in P - As SS tax goes up a(p ; q) shifts down And becomes steeper 0 Probability of Survival 1 Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 25 / 61
48 Effect of increasing social security SS benefit is a substitute for annuity increasing SS reduces demand for annuity Annuity Demand by Type Low SS Tax High SS Tax - a(p ; q) is increasing in P - As SS tax goes up a(p ; q) shifts down And becomes steeper price goes up 0 Probability of Survival 1 Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 25 / 61
49 Effect of increasing social security SS benefit is a substitute for annuity increasing SS reduces demand for annuity Annuity Demand by Type Low SS Tax High SS Tax - a(p ; q) is increasing in P - As SS tax goes up a(p ; q) shifts down And becomes steeper price goes up 0 Probability of Survival 1 What about wlefare? Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 25 / 61
50 Calibration Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 26 / 61
51 Calibration Mortality parameters - Survival probabilities, P t (θ), for each t and θ - Initial distribution of θ: G 0 (θ) Preference/technology parameters - Curvature of utility function - Weight on bequest - Return on saving and time preference Policy parameters - Social security tax and benefits Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 27 / 61
52 Calibrating mortality parameters Observe data on Average survival probabilities (from life tables) Individuals own assessment about longevity (from HRS) Use these observations to back out P t (θ) for each θ The distribution G 0 (θ) Need to impose restriction on P t (θ) Standard assumptions from demography Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 28 / 61
53 Assumptions on P t (θ) Let H t (θ) be cumulative mortality hazard for type θ, define P t (θ) = exp( H t (θ)) Assumption 1: θ shifts mortality hazard H t (θ) = θh t Assumption 2: Initial distribution of θ is gamma g 0 (θ) Gamma( 1 k, k) = kk θ k 1 exp( kθ) Γ(k) Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 29 / 61
54 Assumptions on P t (θ) Let H t (θ) be cumulative mortality hazard for type θ, define P t (θ) = exp( H t (θ)) Assumption 1: θ shifts mortality hazard H t (θ) = θh t Assumption 2: Initial distribution of θ is gamma g 0 (θ) Gamma( 1 k, k) = kk k 1 exp( kθ) θ Γ(k) What are implications of these assumptions? Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 29 / 61
55 Implication of the assumption H t (θ) = θh t Suppose type θ has 50% chance of surviving to age t Then, type 2θ has 25% chance of surviving to the same age Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 30 / 61
56 Implication of the assumption H t (θ) = θh t Suppose type θ has 50% chance of surviving to age t Then, type 2θ has 25% chance of surviving to the same age Once P t (θ) (or H t (θ)) is known for one θ It is known for all θ Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 30 / 61
57 Identifying survival probabilities Unknowns are H t Parameter of distribution G 0 Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 31 / 61
58 Identifying survival probabilities Unknowns are H t Parameter of distribution G 0 T + 1 unknowns 1 unknown Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 31 / 61
59 Identifying survival probabilities Unknowns are H t Parameter of distribution G 0 T + 1 unknowns 1 unknown T + 2 unknowns Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 31 / 61
60 Identifying survival probabilities Unknowns are H t Parameter of distribution G 0 T + 1 unknowns 1 unknown T + 2 unknowns Life table gives population survival probabilities P t = P t (θ)dg 0 (θ) Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 31 / 61
61 Identifying survival probabilities Unknowns are H t Parameter of distribution G 0 Life table Life table gives population survival probabilities P t = exp( θh t )dg 0 (θ) T + 1 unknowns 1 unknown (T + 1) unknowns 1 unknown Given G 0 (θ) the above identity can be solved to find H t Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 31 / 61
62 Identifying survival probabilities Unknowns are H t Parameter of distribution G 0 Life table Life table gives population survival probabilities P t = exp( θh t )dg 0 (θ) T + 1 unknowns 1 unknown (T + 1) unknowns 1 unknown Given G 0 (θ) the above identity can be solved to find H t How do we find G 0 (θ)? Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 31 / 61
63 Subjective survival prob. in HRS HRS asks individuals their subjective prob. of living to 75 Hurd & McGarry(1995,2002): responses are consistent with Life tables Ex post mortality experience Individuals health data Use Gan-Hurd-McFadden(2003) s method to estimate G 0 (θ) Details Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 32 / 61
64 Individual survival curves: P t (θ) 1 Lowest Mortality P (!) t 0.4 Highest Mortality Age Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 33 / 61
65 Individual survival curves: P t (θ) P t (!) 90th percentile th percentile Age Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 33 / 61
66 Individual survival curves: P t (θ) P t (!) 90th percentile th percentile Age Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 33 / 61
67 Individual survival curves: P t (θ) P t (!) 90th percentile th percentile Age Average Life Expectancy at 30: 44 yrs (74 years old) Standard deviation : 4 yrs Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 33 / 61
68 Profile of Life Expectancy by age 100 Life expectancy at each age Age Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 34 / 61
69 Profile of Life Expectancy by age 100 Life expectancy at each age One Standard Deviation Age Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 34 / 61
70 Profile of Life Expectancy by age 100 Life expectancy at each age th %tile 10th %tile One Standard Deviation Age Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 34 / 61
71 Calibration: preferences + social security CRRA utility function u(c) = c1 γ 1 γ Preference parameters are chosen to match Fraction of pension wealth for 70 yrs old in HRS ξ = 0.8 Fraction of SS wealth for 70 yrs old in HRS γ = 1.47 Social security tax: chosen to match %45 replacement ratio Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 35 / 61
72 Calibration summary Parameter Value risk aversion, γ 1.47 weight on bequest, ξ 0.8 discount factor, β return on savings, R SS tax, τ 0.08 variance of g 0 (θ), σθ 2 = 1 k 0.12 Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 36 / 61
73 Fraction of wealth annuitized, average Annuitized Wealth/Total Wealth % SS Wealth/Total Wealth Pension Wealth/Total Wealth Age Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 37 / 61
74 Fraction of wealth annuitized, average Annuitized Wealth/Total Wealth % SS Wealth/Total Wealth Pension Wealth/Total Wealth Age Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 37 / 61
75 Fraction of wealth annuitized, average Annuitized Wealth/Total Wealth % SS Wealth/Total Wealth! and " Chosen to Match These 10 Pension Wealth/Total Wealth Age Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 37 / 61
76 Findings Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 38 / 61
77 Use the model to ask How does annuitization decision vary by mortality type? How do these decisions change by removing SS? Welfare comparison Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 39 / 61
78 Fraction of wealth annuitized at 70, by type 100 % of Wealth Annuitized SS wealth / Total wealth Low Mortality! High Mortality Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 40 / 61
79 Fraction of wealth annuitized at 70, by type 100 % of Wealth Annuitized SS wealth / Total wealth Pension wealth / Total wealth Low Mortality! High Mortality Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 40 / 61
80 Fraction of wealth annuitized at 70, by type 100 Annuitized wealth / Total wealth % of Wealth Annuitized SS wealth / Total wealth Pension wealth / Total wealth Low Mortality! High Mortality Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 40 / 61
81 Fraction of wealth annuitized at 70, by type 100 Annuitized wealth / Total wealth % of Wealth Annuitized SS wealth / Total wealth Pension wealth / Total wealth Low Mortality! High Mortality Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 40 / 61
82 Fraction of wealth annuitized at 70, by type 100 Annuitized wealth / Total wealth % of Wealth Annuitized SS wealth / Total wealth Pension wealth / Total wealth Low Mortality! High Mortality Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 40 / 61
83 Fraction of wealth annuitized at 70, by type 100 Annuitized wealth / Total wealth % of Wealth Annuitized SS wealth / Total wealth Pension wealth / Total wealth Low Mortality! High Mortality Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 40 / 61
84 Fraction of wealth annuitized at 70, by type 100 Annuitized wealth / Total wealth % of Wealth Annuitized SS wealth / Total wealth Pension wealth / Total wealth Low Mortality! High Mortality 60% hold annuity Consistent with evidence in HRS Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 40 / 61
85 Fraction of wealth annuitized at 70, by type 100 Annuitized wealth / Total wealth % of Wealth Annuitized SS wealth / Total wealth Pension wealth / Total wealth Low Mortality! High Mortality 60% hold annuity Consistent with evidence in HRS Johnson-Burman-Kobes(2004) evidence from HRS 43% of all adults (52% of males) hold pensions Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 40 / 61
86 Only market vs Current U.S. 100 % of Wealth Annuitized Annuitized wealth / Total wealth (Current U.S. system) Low Mortality! High Mortality Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 41 / 61
87 Only market vs Current U.S. % of Wealth Annuitized Annuitized wealth / Total wealth (Only private market) Annuitized wealth / Total wealth (Current U.S. system) Low Mortality! High Mortality Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 41 / 61
88 Ex post gain/loss Welfare Gains/Losses from Introducing SS Across Mortality Types 91 percent of population gain on average 0.34% % percent of population lose on average 0.39% Ex ante gain = 0.27% Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 42 / 61
89 Ex post gain/loss 1.5 Welfare Gains/Losses from Introducing SS Across Mortality Types % Counter-factual: fix price at the equilibiurm level without SS Without price increase the ex ante gain is 0.56% Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 42 / 61
90 Can we do better? Social security forces individuals to pool their mortality risk But keeps this pool separate from market pool This derives good risk types out of the market. Alternative policy: - Return contributions to people at retirement - Force them to buy annuity in the market Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 43 / 61
91 Can we do better? Social security forces individuals to pool their mortality risk But keeps this pool separate from market pool This derives good risk types out of the market. Alternative policy: - Return contributions to people at retirement - Force them to buy annuity in the market Ex ante welfare gain increases to 0.36% Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 43 / 61
92 Gains from implementing ex ante efficient What is the maximum ex ante welfare gain from policy? We need to find the solution to utilitarian planner s problem Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 44 / 61
93 Planner s problem [ T ] max β t P t (θ)[u(c t (θ)) + β(1 x t+1 (θ))ξu(b t (θ))] dg 0 (θ) t=0 subject to T t=0 P t (θ) R t [ c t (θ) + (1 x ] t+1(θ)) b t (θ) dg 0 (θ) = R w J t=0 P t (θ) R t dg 0 (θ) Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 45 / 61
94 Planner s problem [ T ] max β t P t (θ)[u(c t (θ)) + β(1 x t+1 (θ))ξu(b t (θ))] dg 0 (θ) t=0 subject to T t=0 P t (θ) R t [ c t (θ) + (1 x ] t+1(θ)) b t (θ) dg 0 (θ) = R w J t=0 P t (θ) R t dg 0 (θ) Planner chooses consumption and bequest Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 45 / 61
95 Planner s problem [ T ] max β t P t (θ)[u(c t (θ)) + β(1 x t+1 (θ))ξu(b t (θ))] dg 0 (θ) t=0 subject to T t=0 P t (θ) R t [ c t (θ) + (1 x ] t+1(θ)) b t (θ) dg 0 (θ) = R w J t=0 P t (θ) R t dg 0 (θ) Planner chooses consumption and bequest Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 45 / 61
96 Planner s problem [ T ] max β t P t (θ)[u(c t (θ)) + β(1 x t+1 (θ))ξu(b t (θ))] dg 0 (θ) t=0 subject to T t=0 P t (θ) R t [ c t (θ) + (1 x ] t+1(θ)) b t (θ) dg 0 (θ) = R w J t=0 P t (θ) R t dg 0 (θ) Notice : No I.C constraints! Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 45 / 61
97 Planner s problem [ T ] max β t P t (θ)[u(c t (θ)) + β(1 x t+1 (θ))ξu(b t (θ))] dg 0 (θ) t=0 subject to T t=0 P t (θ) R t [ c t (θ) + (1 x ] t+1(θ)) b t (θ) dg 0 (θ) = R w J t=0 P t (θ) R t dg 0 (θ) It turns out they don t bind Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 45 / 61
98 Planner s problem [ T ] max β t P t (θ)[u(c t (θ)) + β(1 x t+1 (θ))ξu(b t (θ))] dg 0 (θ) t=0 subject to T t=0 P t (θ) R t [ c t (θ) + (1 x ] t+1(θ)) b t (θ) dg 0 (θ) = R w J t=0 P t (θ) R t dg 0 (θ) Ex ante efficient allocations have very simple form Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 45 / 61
99 Ex ante efficient allocations Perfect insurance against risk type θ c t (θ) = c t (θ ) = c t b t (θ) = b t (θ ) = b t Perfect insurance against time of death, u (c t ) = βru (c t+1 ) = βrξu (b t ) Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 46 / 61
100 Ex ante efficient allocations Perfect insurance against risk type θ c t (θ) = c t (θ ) = c t b t (θ) = b t (θ ) = b t Perfect insurance against time of death, assume Rβ = 1 u (c t ) = u (c t+1 ) = ξu (b t ) Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 46 / 61
101 Ex ante efficient allocations Perfect insurance against risk type θ c t (θ) = c t (θ ) = c t b t (θ) = b t (θ ) = b t Perfect insurance against time of death, assume Rβ = 1 c t = c, b t = b and u (c) = ξu (b) Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 46 / 61
102 Ex ante efficient allocations Perfect insurance against risk type θ c t (θ) = c t (θ ) = c t b t (θ) = b t (θ ) = b t Perfect insurance against time of death, assume Rβ = 1 Can be implemented by c t = c, b t = b and u (c) = ξu (b) - Type-independent social security tax and benefit - Type-independent survivors benefit Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 46 / 61
103 Implementation Ex ante efficient allocation can be implemented useing - Type-independent taxes: 0.14 (compare this to 0.08) - Replacement ratio: 0.71 (compare to 0.45) - Survival benefit before retirement (small) Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 47 / 61
104 Comment There are two key assumptions 1 Only heterogeneity is in mortality 2 Individuals (and planner) are expected utility maximizers Type-independent policy is optimal Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 48 / 61
105 Ex post gain/loss 1.5 Welfare Gains/Losses from Introducing SS Across Mortality Types !0.5 %!1 Gains from implementing ex ante efficient allocation!1.5!2!2.5! ! Ex ante gain = 0.91% Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 49 / 61
106 Conclusion Goal of the paper - Measure the gains from mandatory annuitization in S.S Welfare gain from mandatory annuitization current U.S. system over private markets : 0.27% Large impact on price with negative welfare implications Simple policy change can aleviate this negative price effect Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 50 / 61
107 Extensions Introducing other heterogeneities - Heterogeneity in preference for bequest - The link between measures of income and mortality Detailed model of altruism and intergenerational link Alternative equilibrium notions Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 51 / 61
108 Backup slides Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 52 / 61
109 Sensitivity: Risk aversion 5 Overall Welfare Gains for Various Levels of Risk Aversion,! Ex ante gains in the benchmark model Ex ante gains under autarky 4 3 % 2 1 0!1! Coefficient of Relative Risk Aversion,! Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 53 / 61
110 Sensitivity: Bequest Parameter Overall Welfare Gains for Various Levels of Bequest Parameter,! Ex ante welfare gains in the benchmark model Ex ante welfare gains under autarky % ! Weight on Bequest,! Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 54 / 61
111 Consumption/Saving profiles (w/ SS) 1 Consumption Profile Across Mortality Types, with SS Profile of Liquid Asset Holdings Across Mortality Types, with SS Lowest 5% of Mortality (!) Median Mortality (!) Highest 5% of Mortality (!) Mean c (!) t 0.6 k t (!) Lowest 5% of Mortality (!) Median Mortality (!) Highest 5% of Mortality (!) Mean Age Age Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 55 / 61
112 Consumption/Saving profiles (w/o SS) 1 Consumption Profile Across Mortality Types, without SS Profile of Liquid Asset Holdings Across Mortality Types, without SS Lowest 5% of Mortality (!) Median Mortality (!) Highest 5% of Mortality (!) Mean c t (!) 0.6 k t (!) Lowest 5% of Mortality (!) Median Mortality (!) Highest 5% of Mortality (!) Mean Age Age Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 56 / 61
113 Backups: Calculations under autarky Welfare gains going from Private saving to current US system 2.85% Current US system to ex ante efficient 0.84% 3.71% When there is no annuity market, gains are large Go Back Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 57 / 61
114 Ex post gain/loss Welfare Gains/Losses from Introducing SS Across Mortality Types 8 6 % 4 Gains/Losses when Annuity Market Does not Exist 2 0!2 Ganins/Losses when Annuity Market Exists ! Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 58 / 61
115 Estimation procedure What is observed in HRS Response to the question on subjective survival prob. Ex post mortality/survival Problem : there are many 0 s and 1 s in responses Solution: assume error in reports Type θ at age t makes report r with prob. f(r P 75(θ) P t(θ) ) Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 59 / 61
116 Estimation procedure (cont.) Observing report, r, we can estimate θ using Baye s rule Prior on θ is given by G t (θ) Report, r and f( ) can be used to form a posterior Use posterior mean as estimate for θ Use estimates to form likelihood functions for survival Estimate parameters of G t (θ) and f( ) using MLE Go Back Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 60 / 61
117 Feldstein s quote the existence of asymmetric information may justify a social insurance program (a government annuity in this case) but does not necessarily do so. The case for a mandatory annuity program depends on calculations that could be done but that have not yet been done. Martin Feldstein, presidential address (2005) Go Back Roozbeh Hosseini(ASU) AS in Annuity Market and the Role for SS 61 / 61
Adverse Selection in the Annuity Market and the Role for Social Security
Adverse Selection in the Annuity Market and the Role for Social Security Roozbeh Hosseini Arizona State University First draft: November 2, 27 This version: October 8, 21 Abstract This paper studies the
More informationRetirement Financing: An Optimal Reform Approach. QSPS Summer Workshop 2016 May 19-21
Retirement Financing: An Optimal Reform Approach Roozbeh Hosseini University of Georgia Ali Shourideh Wharton School QSPS Summer Workshop 2016 May 19-21 Roozbeh Hosseini(UGA) 0 of 34 Background and Motivation
More informationThe Welfare Cost of Asymmetric Information: Evidence from the U.K. Annuity Market
The Welfare Cost of Asymmetric Information: Evidence from the U.K. Annuity Market Liran Einav 1 Amy Finkelstein 2 Paul Schrimpf 3 1 Stanford and NBER 2 MIT and NBER 3 MIT Cowles 75th Anniversary Conference
More informationOptimal portfolio choice with health-contingent income products: The value of life care annuities
Optimal portfolio choice with health-contingent income products: The value of life care annuities Shang Wu, Hazel Bateman and Ralph Stevens CEPAR and School of Risk and Actuarial Studies University of
More informationRetirement Saving, Annuity Markets, and Lifecycle Modeling. James Poterba 10 July 2008
Retirement Saving, Annuity Markets, and Lifecycle Modeling James Poterba 10 July 2008 Outline Shifting Composition of Retirement Saving: Rise of Defined Contribution Plans Mortality Risks in Retirement
More informationSocial Security, Life Insurance and Annuities for Families
Social Security, Life Insurance and Annuities for Families Jay H. Hong José-Víctor Ríos-Rull University of Pennsylvania University of Pennsylvania CAERP, CEPR, NBER Carnegie-Rochester Conference on Public
More informationSang-Wook (Stanley) Cho
Beggar-thy-parents? A Lifecycle Model of Intergenerational Altruism Sang-Wook (Stanley) Cho University of New South Wales March 2009 Motivation & Question Since Becker (1974), several studies analyzing
More informationSearch, Moral Hazard, and Equilibrium Price Dispersion
Search, Moral Hazard, and Equilibrium Price Dispersion S. Nuray Akin 1 Brennan C. Platt 2 1 Department of Economics University of Miami 2 Department of Economics Brigham Young University North American
More informationAccounting for non-annuitization
Accounting for non-annuitization Svetlana Pashchenko University of Virginia November 9, 2010 Abstract Why don t people buy annuities? Several explanations have been provided by the previous literature:
More informationOptimal Decumulation of Assets in General Equilibrium. James Feigenbaum (Utah State)
Optimal Decumulation of Assets in General Equilibrium James Feigenbaum (Utah State) Annuities An annuity is an investment that insures against mortality risk by paying an income stream until the investor
More informationConvergence of Life Expectancy and Living Standards in the World
Convergence of Life Expectancy and Living Standards in the World Kenichi Ueda* *The University of Tokyo PRI-ADBI Joint Workshop January 13, 2017 The views are those of the author and should not be attributed
More informationAtkeson, Chari and Kehoe (1999), Taxing Capital Income: A Bad Idea, QR Fed Mpls
Lucas (1990), Supply Side Economics: an Analytical Review, Oxford Economic Papers When I left graduate school, in 1963, I believed that the single most desirable change in the U.S. structure would be the
More informationAccounting for non-annuitization
Accounting for non-annuitization Preliminary version Svetlana Pashchenko University of Virginia January 13, 2010 Abstract Why don t people buy annuities? Several explanations have been provided by the
More informationSang-Wook (Stanley) Cho
Beggar-thy-parents? A Lifecycle Model of Intergenerational Altruism Sang-Wook (Stanley) Cho University of New South Wales, Sydney July 2009, CEF Conference Motivation & Question Since Becker (1974), several
More informationHeterogeneous Firm, Financial Market Integration and International Risk Sharing
Heterogeneous Firm, Financial Market Integration and International Risk Sharing Ming-Jen Chang, Shikuan Chen and Yen-Chen Wu National DongHwa University Thursday 22 nd November 2018 Department of Economics,
More informationMandatory Social Security with Social Planner and with Majority Rule
Mandatory Social Security with Social Planner and with Majority Rule Silvia Platoni Università Cattolica del Sacro Cuore Abstract Several authors have argued that a mandatory social security program undertaken
More informationMacroeconomics 2. Lecture 12 - Idiosyncratic Risk and Incomplete Markets Equilibrium April. Sciences Po
Macroeconomics 2 Lecture 12 - Idiosyncratic Risk and Incomplete Markets Equilibrium Zsófia L. Bárány Sciences Po 2014 April Last week two benchmarks: autarky and complete markets non-state contingent bonds:
More informationRetirement, Saving, Benefit Claiming and Solvency Under A Partial System of Voluntary Personal Accounts
Retirement, Saving, Benefit Claiming and Solvency Under A Partial System of Voluntary Personal Accounts Alan Gustman Thomas Steinmeier This study was supported by grants from the U.S. Social Security Administration
More informationDoes the Social Safety Net Improve Welfare? A Dynamic General Equilibrium Analysis
Does the Social Safety Net Improve Welfare? A Dynamic General Equilibrium Analysis University of Western Ontario February 2013 Question Main Question: what is the welfare cost/gain of US social safety
More informationProblem set Fall 2012.
Problem set 1. 14.461 Fall 2012. Ivan Werning September 13, 2012 References: 1. Ljungqvist L., and Thomas J. Sargent (2000), Recursive Macroeconomic Theory, sections 17.2 for Problem 1,2. 2. Werning Ivan
More informationDeath and Destruction in the Economics of Catastrophes
Death and Destruction in the Economics of Catastrophes Ian W. R. Martin and Robert S. Pindyck Martin: London School of Economics Pindyck: Massachusetts Institute of Technology May 2017 I. Martin and R.
More informationAchieving Actuarial Balance in Social Security: Measuring the Welfare Effects on Individuals
Achieving Actuarial Balance in Social Security: Measuring the Welfare Effects on Individuals Selahattin İmrohoroğlu 1 Shinichi Nishiyama 2 1 University of Southern California (selo@marshall.usc.edu) 2
More informationTopic 3: Policy Design: Social Security
Topic 3: Policy Design: Social Security Johannes Spinnewijn London School of Economics Lecture Notes for Ec426 1 / 33 Outline 1 Why social security? Institutional background Design & Incentives Sustainability
More informationON THE ASSET ALLOCATION OF A DEFAULT PENSION FUND
ON THE ASSET ALLOCATION OF A DEFAULT PENSION FUND Magnus Dahlquist 1 Ofer Setty 2 Roine Vestman 3 1 Stockholm School of Economics and CEPR 2 Tel Aviv University 3 Stockholm University and Swedish House
More informationNotes on Financial Frictions Under Asymmetric Information and Costly State Verification. Lawrence Christiano
Notes on Financial Frictions Under Asymmetric Information and Costly State Verification by Lawrence Christiano Incorporating Financial Frictions into a Business Cycle Model General idea: Standard model
More informationLongevity Risk Pooling Opportunities to Increase Retirement Security
Longevity Risk Pooling Opportunities to Increase Retirement Security March 2017 2 Longevity Risk Pooling Opportunities to Increase Retirement Security AUTHOR Daniel Bauer Georgia State University SPONSOR
More informationThe Budgetary and Welfare Effects of. Tax-Deferred Retirement Saving Accounts
The Budgetary and Welfare Effects of Tax-Deferred Retirement Saving Accounts Shinichi Nishiyama Department of Risk Management and Insurance Georgia State University March 22, 2010 Abstract We extend a
More informationUnderstanding the Distributional Impact of Long-Run Inflation. August 2011
Understanding the Distributional Impact of Long-Run Inflation Gabriele Camera Purdue University YiLi Chien Purdue University August 2011 BROAD VIEW Study impact of macroeconomic policy in heterogeneous-agent
More informationAdverse Selection and Switching Costs in Health Insurance Markets. by Benjamin Handel
Adverse Selection and Switching Costs in Health Insurance Markets: When Nudging Hurts by Benjamin Handel Ramiro de Elejalde Department of Economics Universidad Carlos III de Madrid February 9, 2010. Motivation
More informationAnnuity Markets and Capital Accumulation
Annuity Markets and Capital Accumulation Shantanu Bagchi James Feigenbaum April 6, 208 Abstract We examine how the absence of annuities in financial markets affects capital accumulation in a twoperiod
More informationThe Risky Steady State and the Interest Rate Lower Bound
The Risky Steady State and the Interest Rate Lower Bound Timothy Hills Taisuke Nakata Sebastian Schmidt New York University Federal Reserve Board European Central Bank 1 September 2016 1 The views expressed
More informationSYSM 6304 Risk and Decision Analysis Lecture 2: Fitting Distributions to Data
SYSM 6304 Risk and Decision Analysis Lecture 2: Fitting Distributions to Data M. Vidyasagar Cecil & Ida Green Chair The University of Texas at Dallas Email: M.Vidyasagar@utdallas.edu September 5, 2015
More informationWealth inequality, family background, and estate taxation
Wealth inequality, family background, and estate taxation Mariacristina De Nardi 1 Fang Yang 2 1 UCL, Federal Reserve Bank of Chicago, IFS, and NBER 2 Louisiana State University June 8, 2015 De Nardi and
More informationKeynesian Views On The Fiscal Multiplier
Faculty of Social Sciences Jeppe Druedahl (Ph.d. Student) Department of Economics 16th of December 2013 Slide 1/29 Outline 1 2 3 4 5 16th of December 2013 Slide 2/29 The For Today 1 Some 2 A Benchmark
More informationBailouts, Bail-ins and Banking Crises
Bailouts, Bail-ins and Banking Crises Todd Keister Rutgers University Yuliyan Mitkov Rutgers University & University of Bonn 2017 HKUST Workshop on Macroeconomics June 15, 2017 The bank runs problem Intermediaries
More informationMeasuring Ex-Ante Welfare in Insurance Markets
Measuring Ex-Ante Welfare in Insurance Markets Nathaniel Hendren Harvard University Measuring Welfare in Insurance Markets Insurance markets with adverse selection can be inefficient People may be willing
More informationDiscussion of Optimal Monetary Policy and Fiscal Policy Interaction in a Non-Ricardian Economy
Discussion of Optimal Monetary Policy and Fiscal Policy Interaction in a Non-Ricardian Economy Johannes Wieland University of California, San Diego and NBER 1. Introduction Markets are incomplete. In recent
More informationEco504 Fall 2010 C. Sims CAPITAL TAXES
Eco504 Fall 2010 C. Sims CAPITAL TAXES 1. REVIEW: SMALL TAXES SMALL DEADWEIGHT LOSS Static analysis suggests that deadweight loss from taxation at rate τ is 0(τ 2 ) that is, that for small tax rates the
More informationSTATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Comprehensive Examination: Macroeconomics Fall, 2016
STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Comprehensive Examination: Macroeconomics Fall, 2016 Section 1. (Suggested Time: 45 Minutes) For 3 of the following 6 statements, state
More informationDesigning the Optimal Social Security Pension System
Designing the Optimal Social Security Pension System Shinichi Nishiyama Department of Risk Management and Insurance Georgia State University November 17, 2008 Abstract We extend a standard overlapping-generations
More informationFinancing National Health Insurance and Challenge of Fast Population Aging: The Case of Taiwan
Financing National Health Insurance and Challenge of Fast Population Aging: The Case of Taiwan Minchung Hsu Pei-Ju Liao GRIPS Academia Sinica October 15, 2010 Abstract This paper aims to discover the impacts
More informationOptimal Actuarial Fairness in Pension Systems
Optimal Actuarial Fairness in Pension Systems a Note by John Hassler * and Assar Lindbeck * Institute for International Economic Studies This revision: April 2, 1996 Preliminary Abstract A rationale for
More informationOn the Design of an European Unemployment Insurance Mechanism
On the Design of an European Unemployment Insurance Mechanism Árpád Ábrahám João Brogueira de Sousa Ramon Marimon Lukas Mayr European University Institute and Barcelona GSE - UPF, CEPR & NBER ADEMU Galatina
More informationADVERSE SELECTION IN INSURANCE MARKETS: POLICYHOLDER EVIDENCE FROM THE U.K. ANNUITY MARKET
ADVERSE SELECTION IN INSURANCE MARKETS: POLICYHOLDER EVIDENCE FROM THE U.K. ANNUITY MARKET Amy Finkelstein Harvard University and NBER James Poterba MIT and NBER Revised August 2002 ABSTRACT In this paper,
More informationGraduate Macro Theory II: Fiscal Policy in the RBC Model
Graduate Macro Theory II: Fiscal Policy in the RBC Model Eric Sims University of otre Dame Spring 7 Introduction This set of notes studies fiscal policy in the RBC model. Fiscal policy refers to government
More informationThe Implications of a Greying Japan for Public Policy.
The Implications of a for Public Policy. R. Anton Braun Federal Reserve Bank of Atlanta Douglas Joines University of Southern California 1 Canon Institute for Global Studies August 19, 2011 1 The views
More informationLife Expectancy and Old Age Savings
Life Expectancy and Old Age Savings Mariacristina De Nardi, Eric French, and John Bailey Jones December 16, 2008 Abstract Rich people, women, and healthy people live longer. We document that this heterogeneity
More informationThe Role of the Annuity s Value on the Decision (Not) to Annuitize: Evidence from a Large Policy Change
The Role of the Annuity s Value on the Decision (Not) to Annuitize: Evidence from a Large Policy Change Monika Bütler, Universität St. Gallen (joint with Stefan Staubli and Maria Grazia Zito) September
More informationWealth Accumulation in the US: Do Inheritances and Bequests Play a Significant Role
Wealth Accumulation in the US: Do Inheritances and Bequests Play a Significant Role John Laitner January 26, 2015 The author gratefully acknowledges support from the U.S. Social Security Administration
More informationOptimal Credit Market Policy. CEF 2018, Milan
Optimal Credit Market Policy Matteo Iacoviello 1 Ricardo Nunes 2 Andrea Prestipino 1 1 Federal Reserve Board 2 University of Surrey CEF 218, Milan June 2, 218 Disclaimer: The views expressed are solely
More informationPublic Pension Reform in Japan
ECONOMIC ANALYSIS & POLICY, VOL. 40 NO. 2, SEPTEMBER 2010 Public Pension Reform in Japan Akira Okamoto Professor, Faculty of Economics, Okayama University, Tsushima, Okayama, 700-8530, Japan. (Email: okamoto@e.okayama-u.ac.jp)
More informationIndexing and Price Informativeness
Indexing and Price Informativeness Hong Liu Washington University in St. Louis Yajun Wang University of Maryland IFS SWUFE August 3, 2017 Liu and Wang Indexing and Price Informativeness 1/25 Motivation
More informationOld, Sick Alone, and Poor: A Welfare Analysis of Old-Age Social Insurance Programs
Old, Sick Alone, and Poor: A Welfare Analysis of Old-Age Social Insurance Programs R. Anton Braun Federal Reserve Bank of Atlanta Karen A. Kopecky Federal Reserve Bank of Atlanta Tatyana Koreshkova Concordia
More informationRetirement Financing: An Optimal Reform Approach
Retirement Financing: An Optimal Reform Approach Roozbeh Hosseini University of Georgia Federal Reserve Bank of Atlanta roozbeh@uga.edu Ali Shourideh Carnegie Mellon University ashourid@andrew.cmu.edu
More informationMortality Learning and Optimal Annuitization
Mortality Learning and Optimal Annuitization Gunnar Poppe-Yanez November 6, 2017 Abstract The disparity between the theoretical high demand for annuities and the empirical low holdings of these assets,
More informationSlides III - Complete Markets
Slides III - Complete Markets Julio Garín University of Georgia Macroeconomic Theory II (Ph.D.) Spring 2017 Macroeconomic Theory II Slides III - Complete Markets Spring 2017 1 / 33 Outline 1. Risk, Uncertainty,
More informationAnd All the days of Methuselah were nine hundred sixty and nine years: and he died (Genesis 5:27).
CHAPTER 1 Introduction And All the days of Methuselah were nine hundred sixty and nine years: and he died (Genesis 5:27). An annuity is a financial product that entitles the holder to a certain return
More informationDIFFERENTIAL MORTALITY, UNCERTAIN MEDICAL EXPENSES, AND THE SAVING OF ELDERLY SINGLES
DIFFERENTIAL MORTALITY, UNCERTAIN MEDICAL EXPENSES, AND THE SAVING OF ELDERLY SINGLES Mariacristina De Nardi Federal Reserve Bank of Chicago, NBER, and University of Minnesota Eric French Federal Reserve
More informationEconomics 121b: Intermediate Microeconomics Final Exam Suggested Solutions
Dirk Bergemann Department of Economics Yale University Economics 121b: Intermediate Microeconomics Final Exam Suggested Solutions 1. Both moral hazard and adverse selection are products of asymmetric information,
More informationA Model with Costly Enforcement
A Model with Costly Enforcement Jesús Fernández-Villaverde University of Pennsylvania December 25, 2012 Jesús Fernández-Villaverde (PENN) Costly-Enforcement December 25, 2012 1 / 43 A Model with Costly
More informationFinancial Economics Field Exam August 2011
Financial Economics Field Exam August 2011 There are two questions on the exam, representing Macroeconomic Finance (234A) and Corporate Finance (234C). Please answer both questions to the best of your
More informationUNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS
UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS Postponed exam: ECON4310 Macroeconomic Theory Date of exam: Wednesday, January 11, 2017 Time for exam: 09:00 a.m. 12:00 noon The problem set covers 13 pages (incl.
More informationSession 132 L - New Developments in Mortality Risk Pooling. Moderator: Deborah A. Tully, FSA, EA, FCA, MAAA. Presenter: Rowland Davis, FSA
Session 132 L - New Developments in Mortality Risk Pooling Moderator: Deborah A. Tully, FSA, EA, FCA, MAAA Presenter: Rowland Davis, FSA SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer
More informationOptimal portfolio choice with health-contingent income products: The value of life care annuities
Optimal portfolio choice with health-contingent income products: The value of life care annuities Shang Wu, Hazel Bateman, Ralph Stevens July, 2016 ABSTRACT Whereas there is ample evidence that life-contingent
More informationInflation & Welfare 1
1 INFLATION & WELFARE ROBERT E. LUCAS 2 Introduction In a monetary economy, private interest is to hold not non-interest bearing cash. Individual efforts due to this incentive must cancel out, because
More informationOverborrowing, Financial Crises and Macro-prudential Policy. Macro Financial Modelling Meeting, Chicago May 2-3, 2013
Overborrowing, Financial Crises and Macro-prudential Policy Javier Bianchi University of Wisconsin & NBER Enrique G. Mendoza Universtiy of Pennsylvania & NBER Macro Financial Modelling Meeting, Chicago
More informationReview of Economic Dynamics
Review of Economic Dynamics 15 (2012) 226 243 Contents lists available at ScienceDirect Review of Economic Dynamics www.elsevier.com/locate/red Bequest motives and the annuity puzzle Lee M. Lockwood 1
More informationBank Capital, Agency Costs, and Monetary Policy. Césaire Meh Kevin Moran Department of Monetary and Financial Analysis Bank of Canada
Bank Capital, Agency Costs, and Monetary Policy Césaire Meh Kevin Moran Department of Monetary and Financial Analysis Bank of Canada Motivation A large literature quantitatively studies the role of financial
More informationPROBLEM SET 6 ANSWERS
PROBLEM SET 6 ANSWERS 6 November 2006. Problems.,.4,.6, 3.... Is Lower Ability Better? Change Education I so that the two possible worker abilities are a {, 4}. (a) What are the equilibria of this game?
More informationIdiosyncratic risk and the dynamics of aggregate consumption: a likelihood-based perspective
Idiosyncratic risk and the dynamics of aggregate consumption: a likelihood-based perspective Alisdair McKay Boston University March 2013 Idiosyncratic risk and the business cycle How much and what types
More informationCredit Crises, Precautionary Savings and the Liquidity Trap October (R&R Quarterly 31, 2016Journal 1 / of19
Credit Crises, Precautionary Savings and the Liquidity Trap (R&R Quarterly Journal of nomics) October 31, 2016 Credit Crises, Precautionary Savings and the Liquidity Trap October (R&R Quarterly 31, 2016Journal
More informationRevisiting Tax on Top Income
Revisiting Tax on Top Income Ayşe İmhrohoğlu, Cagri Kumi and Arm Nakornthab, 2017 Presented by Johannes Fleck November 28, 2017 Structure of the paper (and today s presentation) 1. Research question 2.
More informationProblem Set 2. Theory of Banking - Academic Year Maria Bachelet March 2, 2017
Problem Set Theory of Banking - Academic Year 06-7 Maria Bachelet maria.jua.bachelet@gmai.com March, 07 Exercise Consider an agency relationship in which the principal contracts the agent, whose effort
More informationRetirement Financing: An Optimal Reform Approach
Retirement Financing: An Optimal Reform Approach Roozbeh Hosseini UGA & FRB Atlanta roozbeh@uga.edu Ali Shourideh Carnegie Mellon University ashourid@andrew.cmu.edu January 3, 29 Abstract We study Pareto
More informationFinancial Crises, Dollarization and Lending of Last Resort in Open Economies
Financial Crises, Dollarization and Lending of Last Resort in Open Economies Luigi Bocola Stanford, Minneapolis Fed, and NBER Guido Lorenzoni Northwestern and NBER Restud Tour Reunion Conference May 2018
More informationRetirement Security: What s Working and What s Not? James Poterba MIT, NBER, & TIAA-CREF. Bipartisan Policy Center 30 July 2014
Retirement Security: What s Working and What s Not? James Poterba MIT, NBER, & TIAA-CREF Bipartisan Policy Center 30 July 2014 Retirement Support: A Three Legged Stool? Three Legs: Social Security, Private
More informationTAKE-HOME EXAM POINTS)
ECO 521 Fall 216 TAKE-HOME EXAM The exam is due at 9AM Thursday, January 19, preferably by electronic submission to both sims@princeton.edu and moll@princeton.edu. Paper submissions are allowed, and should
More informationAre Americans Saving Optimally for Retirement?
Figure : Median DB Pension Wealth, Social Security Wealth, and Net Worth (excluding DB Pensions) by Lifetime Income, (99 dollars) 400,000 Are Americans Saving Optimally for Retirement? 350,000 300,000
More informationHousehold Finance in China
Household Finance in China Russell Cooper 1 and Guozhong Zhu 2 October 22, 2016 1 Department of Economics, the Pennsylvania State University and NBER, russellcoop@gmail.com 2 School of Business, University
More informationOptimal Redistribution in an Open Economy
Optimal Redistribution in an Open Economy Oleg Itskhoki Harvard University Princeton University January 8, 2008 1 / 29 How should society respond to increasing inequality? 2 / 29 How should society respond
More informationDARTMOUTH COLLEGE, DEPARTMENT OF ECONOMICS ECONOMICS 21. Dartmouth College, Department of Economics: Economics 21, Summer 02. Topic 5: Information
Dartmouth College, Department of Economics: Economics 21, Summer 02 Topic 5: Information Economics 21, Summer 2002 Andreas Bentz Dartmouth College, Department of Economics: Economics 21, Summer 02 Introduction
More informationLabor Economics Field Exam Spring 2011
Labor Economics Field Exam Spring 2011 Instructions You have 4 hours to complete this exam. This is a closed book examination. No written materials are allowed. You can use a calculator. THE EXAM IS COMPOSED
More informationMonetary Economics: Problem Set #6 Solutions
Monetary Economics Problem Set #6 Monetary Economics: Problem Set #6 Solutions This problem set is marked out of 00 points. The weight given to each part is indicated below. Please contact me asap if you
More informationSurvival pessimism and the demand for annuities
Survival pessimism and the demand for annuities IFS Working Paper W19/02 Corman O'Dea David Sturrock Survival pessimism and the demand for annuities Cormac O Dea David Sturrock January 17, 2019 Abstract
More informationIntroduction to Economics I: Consumer Theory
Introduction to Economics I: Consumer Theory Leslie Reinhorn Durham University Business School October 2014 What is Economics? Typical De nitions: "Economics is the social science that deals with the production,
More informationSTATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Comprehensive Examination: Macroeconomics Fall, 2010
STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Comprehensive Examination: Macroeconomics Fall, 2010 Section 1. (Suggested Time: 45 Minutes) For 3 of the following 6 statements, state
More informationMidterm 1, Financial Economics February 15, 2010
Midterm 1, Financial Economics February 15, 2010 Name: Email: @illinois.edu All questions must be answered on this test form. Question 1: Let S={s1,,s11} be the set of states. Suppose that at t=0 the state
More informationFinancial Frictions Under Asymmetric Information and Costly State Verification
Financial Frictions Under Asymmetric Information and Costly State Verification General Idea Standard dsge model assumes borrowers and lenders are the same people..no conflict of interest. Financial friction
More informationLecture 2: Stochastic Discount Factor
Lecture 2: Stochastic Discount Factor Simon Gilchrist Boston Univerity and NBER EC 745 Fall, 2013 Stochastic Discount Factor (SDF) A stochastic discount factor is a stochastic process {M t,t+s } such that
More informationReforming the Social Security Earnings Cap: The Role of Endogenous Human Capital
Reforming the Social Security Earnings Cap: The Role of Endogenous Human Capital Adam Blandin Arizona State University May 20, 2016 Motivation Social Security payroll tax capped at $118, 500 Policy makers
More informationA Macroeconomic Model with Financial Panics
A Macroeconomic Model with Financial Panics Mark Gertler, Nobuhiro Kiyotaki, Andrea Prestipino NYU, Princeton, Federal Reserve Board 1 March 218 1 The views expressed in this paper are those of the authors
More informationLow Fertility, Rapid Aging and Fiscal Challenges with the Presence of Informal Employment
Low Fertility, Rapid Aging and Fiscal Challenges with the Presence of Informal Employment Tanyasorn Ekapirak 1, Minchung Hsu 1, Pei-Ju Liao 2 1 National Graduate Institute for Policy Studies (GRIPS), Tokyo
More informationNordic Journal of Political Economy
Nordic Journal of Political Economy Volume 39 204 Article 3 The welfare effects of the Finnish survivors pension scheme Niku Määttänen * * Niku Määttänen, The Research Institute of the Finnish Economy
More informationOptimal Spatial Taxation
Optimal Spatial Taxation Are Big Cities Too Small? Jan Eeckhout and Nezih Guner & University College London, Barcelona GSE-UPF & ICREA-MOVE, Autonoma, and Barcelona GSE Wharton November 4, 2014 Motivaton
More informationNotes on Financial Frictions Under Asymmetric Information and Costly State Verification. Lawrence Christiano
Notes on Financial Frictions Under Asymmetric Information and Costly State Verification by Lawrence Christiano Incorporating Financial Frictions into a Business Cycle Model General idea: Standard model
More informationLinear Capital Taxation and Tax Smoothing
Florian Scheuer 5/1/2014 Linear Capital Taxation and Tax Smoothing 1 Finite Horizon 1.1 Setup 2 periods t = 0, 1 preferences U i c 0, c 1, l 0 sequential budget constraints in t = 0, 1 c i 0 + pbi 1 +
More informationThe Lost Generation of the Great Recession
The Lost Generation of the Great Recession Sewon Hur University of Pittsburgh January 21, 2016 Introduction What are the distributional consequences of the Great Recession? Introduction What are the distributional
More informationA Quantitative Theory of Unsecured Consumer Credit with Risk of Default
A Quantitative Theory of Unsecured Consumer Credit with Risk of Default Satyajit Chatterjee Federal Reserve Bank of Philadelphia Makoto Nakajima University of Pennsylvania Dean Corbae University of Pittsburgh
More informationGeneral Examination in Microeconomic Theory SPRING 2014
HARVARD UNIVERSITY DEPARTMENT OF ECONOMICS General Examination in Microeconomic Theory SPRING 2014 You have FOUR hours. Answer all questions Those taking the FINAL have THREE hours Part A (Glaeser): 55
More informationSTATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Comprehensive Examination: Macroeconomics Spring, 2016
STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Comprehensive Examination: Macroeconomics Spring, 2016 Section 1. Suggested Time: 45 Minutes) For 3 of the following 6 statements,
More information