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A TRAGEDY OF ANNUITIZATION? LONGEVITY INSURANCE IN GENERAL EQUILIBRIUM

Published online by Cambridge University Press:  13 June 2013

Ben J. Heijdra ,
Jochen O. Mierau  and
S. M. Reijnders
Ben J. Heijdra*
Affiliation:
University of Groningen IHS (Vienna) CESifo and Netspar
Jochen O. Mierau
Affiliation:
University of Groningen and Netspar
S. M. Reijnders
Affiliation:
University of Groningen and Netspar
*
Address correspondence to: Ben J. Heijdra, Faculty of Economics and Business, University of Groningen, P.O. Box 800, 9700 AV Groningen, The Netherlands; e-mail: b.j.heijdra@rug.nl.
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Abstract

We study the microeconomic and macroeconomic effects of longevity insurance. Using a tractable discrete-time overlapping-generations model of a closed economy we first study different types of government redistribution of accidental bequests in general equilibrium. Individuals face longevity risk, as there is a positive probability of passing away before the retirement period. We find nonpathological cases where it is better for long-run welfare to waste accidental bequests than to give them to the elderly. Next we study the introduction of a perfectly competitive life insurance market offering actuarially fair annuities. There exists a tragedy of annuitization: although full annuitization of assets is privately optimal, it is not socially beneficial, because of adverse general equilibrium repercussions.

Keywords

Longevity RiskRisk SharingOverlapping GenerationsIntergenerational TransfersAnnuity Markets

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Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 7 , October 2014 , pp. 1607 - 1634
Copyright
Copyright © Cambridge University Press 2013 

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