Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70506
Authors: 
Pashchenko, Svetlana
Year of Publication: 
2010
Series/Report no.: 
Working Paper, Federal Reserve Bank of Chicago 2010-03
Abstract: 
Why don't people buy annuities? Several explanations have been provided by the previous literature: large fraction of preannuitized wealth in retirees' portfolios; adverse selection; bequest motives; and medical expense uncertainty. This paper uses a quantitative model to assess the importance of these impediments to annuitization and also studies three newer explanations: government safety net in terms of means-tested transfers; illiquidity of housing wealth; and restrictions on minimum amount of investment in annuities. This paper shows that quantitatively the last three explanations play a big role in reducing annuity demand. The minimum consumption floor turns out to be important to explain the lack of annuitization, especially for people in lower income quintiles, who are well insured by this provision. The minimum annuity purchase requirement involves big up-front investment and is binding for many, especially if housing wealth cannot be easily annuitized. Among the traditional explanations, preannuitized wealth has the largest quantitative contribution to the annuity puzzle.
Subjects: 
annuity puzzle
longevity insurance
adverse selection
JEL: 
D91
G11
G22
Document Type: 
Working Paper

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