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

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