Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-23T20:48:13.012Z Has data issue: false hasContentIssue false
  • English
  • Français

Enhancing Retirement Security Through the Tax Code: The Efficacy of Tax-Based Subsidies in Life Annuity Markets

Published online by Cambridge University Press:  16 June 2009

WILLIAM M. GENTRY  and
CASEY G. ROTHSCHILD
WILLIAM M. GENTRY
Affiliation:
Williams College
CASEY G. ROTHSCHILD*
Affiliation:
Middlebury College
*
*Corresponding Author: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

The under-development of existing annuity markets coupled with the secular trend away from traditional pensions towards defined contribution accounts in the U.S. raises significant concerns about the adequacy of retirement income for future retirees. We develop dynamic programming techniques to evaluate the efficacy of policies designed to address this concern by encouraging annuitization. Our analysis suggests that policies providing monetary incentives through the tax code can indeed significantly enhance annuitization among retirees: our central estimates suggest that tax-exemption based policies which have been recently proposed in Congress have the potential to increase annuitization by as much as $50,000 for each retired household, at a relatively modest revenue cost to the government. Similar sized policies based instead on refundable tax credits may be more desirable from both efficiency and distributional perspectives.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 9 , Issue 2 , April 2010 , pp. 185 - 218
Copyright
Copyright © Cambridge University Press 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

American Council of Life Insurers (ACLI), “Positioning and Promoting Annuities in a New Retirement Environment,” Task Force on Annuity Messages, 1999.Google Scholar
Ameriks, John. “The Retirement Patterns and Annuitization Decisions of a Cohort of TIAA-CREF Participants,” TIAA-CREF Institute Research Dialogues. Issue 60, August 1999.Google Scholar
Attanasio, Orazio and Hilary, Hoynes, 2000, Differential Mortality and Wealth Accumulation, Journal of Human Resources 35:1, 1–29.CrossRefGoogle Scholar
Bell, Felicitie and Michael, Miller, 2005, Life Tables for the United States Social Security Area 1900–2100, Actuarial Study No. 120 Social Security Administration, Office of the Chief Actuary.Google Scholar
Brown, Jeffrey R. and Poterba, James M., 2000, Joint Life Annuities and Annuity Demand by Married Couples, Journal of Risk and Insurance 67 Issue 4, 527–553.Google Scholar
Brown, Jeffrey R. and Mark, Warshawsky, 2000, Longevity Insured Retirement Distributions from Pension Plans: Market and Regulatory Issues. In Public Policies and Private Pensions, Gale, W., Shoven, J., Warshawsky, M. eds., Brookings Institution: Washington, D.C.Google Scholar
Brown, Jeffrey, 2000, How Should We Insure Longevity Risk in Pensions and Social Security?, Boston College Center For Retirement Security Issues in Brief.Google Scholar
Brown, Jeffrey, 2001, Private Pensions, Mortality Risk, and the Decision to Annuitize, Journal of Public Economics 82:1, 29–62.CrossRefGoogle Scholar
Choi, James, David, Laibson, Brigitte, C. Madrian, and Andrew, Metrick “For Better or For Worse: Default Effects and 401(k) Savings Behavior” (with). In Wise, David, editor, Perspectives on the Economics of Aging, pp. 81–121. Chicago: University of Chicago Press, 2004.CrossRefGoogle Scholar
Cutler, David M. and Reber, Sarah J., 1998, Paying for Health Insurance: The Trade-Off between Competition and Adverse Selection, Quarterly Journal of Economics 113:2, 433–466.CrossRefGoogle Scholar
Davidoff, Thomas, Jeffrey, Brown, and Peter, Diamond, 2005, Annuities and Individual Welfare, American Economic Review 95:5, 1573–1590.Google Scholar
Dushi, Irene and Anthony, Webb, 2004, Household Annuitization Decisions: Simulations and Empirical Analyses, Journal of Pension Economics and Finance 3:2.Google Scholar
Feenberg, Daniel and Elisabeth, Coutts, 1993, An Introduction to the TAXSIM Model, Journal of Policy Analysis and Management 12:1, 189–194.CrossRefGoogle Scholar
Finkelstein, Amy and James, Poterba, 2004, Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market, Journal of Political Economy 112:1 Part 1, 183–208.Google Scholar
Friedman, Benjamin and Mark, Warshawsky, 1990, The Cost of Annuities: Implications for Saving Behavior and Bequests, Quarterly Journal of Economics 105:1, 135–154.Google Scholar
James, and Vittas, , 2004, Annuity Markets in Comparative Perspective: Do Consumers Get Their Money's Worth?, World Bank.Google Scholar
LIMRA International, “U.S. Individual Annuities: Industry Highlights,” First Quarter 2007Google Scholar
Johnson, Richard, Leonard, Burman and Deborah, Kobes, 2004, Annuitized Wealth at Older Ages: Evidence from the Health and Retirement Study, Urban Institute.Google Scholar
Milevsky, Moshe, 1998, Optimal asset allocation towards the end of the life cycle: to annuitize or not to annuitize? Journal of Risk and Insurance 65:3, 401–426.Google Scholar
Mitchell, Olivia, James, Poterba, Mark, Warsawsky and Jeffrey, Brown, 1999, New Evidence on the Money's worth of Individual Annuities, American=Economic Review 89 Issue 5, 1299–1318.Google Scholar
McCulloch, J. Huston, 2006, The U.S. Real Term Structure of Interest Rates with Implicit Inflation Premium, http://www.econ.ohio-state.edu/jhm/ts/ts.html#comp.Google Scholar
NAVA, 2005, 2005 Annuity Fact Book, National Association for Variable Annuities.Google Scholar
Poterba, James, Joshua, Rauh, Steven, Venti and David, Wise, 2003, Utility Evaluation of Risk in Retirement Saving Accounts, NBER Working Paper 9892.CrossRefGoogle Scholar
Reichenstein, William, 2002, Who Should Buy a Non-Qualified, Deferred Annuity, Financial Services Review 11: 11–31.Google Scholar
Sinclair, Sven and Kent, Smetters, 2004, Heath Shocks and the Demand for Annuities, Technical Paper Series, Congressional Budget Office.Google Scholar
Smith, James and Raynard, Kington, 1997, Demographic and Economic Correlates of Health in Old Age, Demography 34 Issue 1, 159–170.Google Scholar
Tax Policy Center, Tax Facts, Returns by Marginal Tax Rate 2000, http://taxpolicycenter.org/TaxFacts/TFDB/TFTemplate.cfm?Docid=214.Google Scholar
Turra, Cassio and Olivia, Mitchell, 2004, The Impact of Health Status and Out-of-Pocket Medical Expenditures on Annuity Valuation, University of Michigan Retirement Research Paper, WP 2004-086.CrossRefGoogle Scholar
Vanguard Lifetime Income Program, Get an Instant Quote, https://flagship4.vanguard.com/VGApp/hnw/content/AccountServ/Retirement/ATSAnnuitiesOVContent.jsp Accessed July 23, 2006.Google Scholar
Yaari, Menahem, 1965, Uncertain Lifetime, Life Insurance, and the Theory of the Consumer, The Review of Economic Studies, 32: 137–150.Google Scholar