Hostname: page-component-78c5997874-t5tsf Total loading time: 0 Render date: 2024-11-10T19:54:59.523Z Has data issue: false hasContentIssue false
  • English
  • Français

Annuitisation and cross-subsidies in a two-tiered retirement saving system

Published online by Cambridge University Press:  26 August 2014

Benjamin Avanzi  and
Sachi Purcal
Benjamin Avanzi*
Affiliation:
School of Risk and Actuarial Studies, Australian School of Business, UNSW, Sydney, NSW, 2052, Australia Département de Mathématiques et de Statistique, Université de Montréal, Montréal, Québec, H3T 1J4, Canada
Sachi Purcal
Affiliation:
Department of Applied Finance and Actuarial Studies, Faculty of Business and Economics, Macquarie University, NSW, 2109, Australia
*
*Correspondence to: Benjamin Avanzi, Université de Montréal, Département de mathématiques et de statistique, C.P 6128 Succursale Centre-Ville, Montréal, (QC) H3C 3J7, Canada. Tel +1 514 343 6695. Fax +1 514 343 5700. E-mail: avanzi@dms.umontreal.ca
Get access Rights & Permissions [Opens in a new window]

Abstract

We develop a generalisation of the World Bank (1994) model of forced saving for retirement. This broader model consists of two tiers of second pillar savings – mandated and non-mandated (voluntary). Furthermore, the government can set two types of guarantees on the first (mandated) tier – investment returns and annuity prices – leading to possible cross-subsidisation between the tiers. This has the potential to induce social redistribution, foster a liquid private market for life annuities, and obviate some of the investment risk and annuity price risk that retirees face.

We formulate a quantitative model of financial flows within such a system, which explains the mechanism by which cross-subsidisation occurs. Based on this analysis, a taxonomy of two-tiered retirement systems is presented, that is based on the choices that the government makes.

Keywords

Retirement savingsPensionsRegulationAnnuitisation

JEL classification

E21: Consumption • Saving • Wealth G23: Non-bank Financial Institutions • Financial Instruments • Institutional Investors H55: Social Security and Public Pensions D81: Criteria for Decision-Making under Risk and Uncertainty D91: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡ J26: Retirement • Retirement Policies
Type
Papers
Information
Annals of Actuarial Science , Volume 8 , Issue 2 , September 2014 , pp. 234 - 252
Copyright
© Institute and Faculty of Actuaries 2014 

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

Andrews, D. & Brown, R.L. (2009). Is defined contribution a panacea for defined benefit social security funding problems? Lessons from two countries. North American Actuarial Journal, 13(2), 186–201.Google Scholar
Avanzi, B. (2010). What is it that makes the Swiss annuitise? A description of the Swiss retirement system. Australian Actuarial Journal, 16(2), 135–162.Google Scholar
Brown, J.R., Mitchell, O.S., Poterba, J.M. & Warshawsky, M.J. (Eds.). (2001). The Role of Annuity Markets in Financing Retirement. The MIT Press, Cambridge, MA.CrossRefGoogle Scholar
Bütler, M. (2003). Mandated annuities in Switzerland, techical report, DEEP Université de Lausanne & CEPR, 17 March Lausanne, Switzerland.CrossRefGoogle Scholar
Bütler, M. (2009). Switzerland: high replacement rates and generous subsistence as a barrier to work in old age subsistence as a barrier to work in old age. The Geneva Papers, 34, 561–577.Google Scholar
Bütler, M. & Staubli, S. (2011). Payouts in Switzerland: explaining developments in annuitization. In Mitchell O.S., Piggott J. & Tayakama N., (Eds.), Securing Lifelong Retirement Income: Global Annuity Retirement Payouts. (chapter 11, pp. 195–213) Oxford University Press, Oxford, UK.CrossRefGoogle Scholar
Bütler, M. & Teppa, F. (2007). The choice between an annuity and a lump sum: results from Swiss pension funds. Journal of Public Economics, 91(10), 1944–1966.CrossRefGoogle Scholar
Davidoff, T., Brown, J.R. & Diamond, P.A. (2005). Annuities and individual welfare. American Economic Review Papers & Proceedings, 95(5), 1573–1590.CrossRefGoogle Scholar
Disney, R. (2000). Declining public pensions in an era of demographic ageing: will private provision fill the gap? European Economic Review, 44(4–6), 957–973.Google Scholar
Franklin, J. (2001). The Science of Conjecture: Evidence and Probability Before Pascal. The John Hopkins University Press, Baltimore and London.Google Scholar
Gale, W.G., Iwry, J.M., John, D.C. & Walker, L. (2009). Increasing annuitization in 401(k) plans with automatic trial income. In Gale W.G., Iwry J.M., John D.C. & Walker L., (Eds.), Automatic: Changing the Way America Saves (chapter 6, pp. 123–150). Brookings Institution Press, Washington, DC.Google Scholar
Gantenbein, M. & Mata, M.A. (Eds.). (2008). Swiss Annuities and Life Insurance: Secure Returns, Asset Protection and Privacy. John Wiley & Sons, Inc., Hoboken, NJ.Google Scholar
Gentry, W.M. & Rothschild, C.G. (2010). Enhancing retirement security through the tax code: the efficacy of tax-based subsidies in life annuity markets. Journal of Pension Economics and Finance, 9(2), 185–218 Available online at the address http://dx.doi.org/10.1017/S147474720900399Google Scholar
Gerber, D.S. & Weber, R. (2007). Demography and investment behavior of pension funds: evidence for Switzerland. Journal of Pension Economics and Finance, 6(3), 313–337.Google Scholar
Hepp, S. (1998). Mandatory occupational pension schemes in Switzerland: the first ten years. Annals of Public and Cooperative Economics, 69(4), 533–545.Google Scholar
Iwry, J.M. & Turner, J.A. (2009). Automatic annuitization: new behavioral strategies for expanding lifetime income in 401(k)s. In Automatic: Changing the Way America Saves (chapter 7, pp. 151–172). Brookings Institution Press, Washington, DC.Google Scholar
Mitchell, O.S., Poterba, J.M., Warshawsky, M.J. & Brown, J.R. (1999). New evidence on the money’s worth of individual annuities. American Economic Review, 89(5), 1299–1318.CrossRefGoogle Scholar
Mitchell, O.S. & Smetters, K., (Eds.). (2003). The Pension Challenge: Risk Transfers and Retirement Income Security. Oxford University Press, New York, NY.CrossRefGoogle Scholar
OECD. (2009). Pensions at a Glance 2009: Retirement-Income Systems in OECD Countries. OECD, Paris, France.Google Scholar
OECD. (2013). Main economic indicators – complete database. Available online at the address http://dx.doi.org/10.1787/data-00052-en [accessed 27-Nov-2013].Google Scholar
Office fédéral de la statistique. (2007). Une nouvelle méthode pour l'enquête sur les revenus et la consommation: Nouveau modèle de pondération, résultats 2000−2003 et étude sur la prévoyance vieillesse. OFS, Bern, Switzerland.Google Scholar
Orth, B.J. (2006). Managing longevity risk in U.S. retirement plans through mandatory annuitization. North American Actuarial Journal, 10(3), 32–44.Google Scholar
Plan for Life Research Pty Ltd. (2011). The immediate annuity product and rate report, technical report, Plan for Life Research Pty Ltd, Melbourne, Australia.Google Scholar
Poterba, J.M. (2001). A brief history of annuity markets. In Brown J.R., Mitchell O.S., Poterba J.M. & Warshawsky M.J., (Eds.), The Role of Annuity Markets in Financing Retirement (pp. 23–56) The MIT Press, Cambridge, MA.Google Scholar
Purcal, S. & Piggott, J. (2008). Explaining low annuity demand: an optimal portfolio application to Japan. Journal of Risk & Insurance, 75(2), 493–516.CrossRefGoogle Scholar
SonntagsZeitung. (2013). Dossier Geld/Pensionkasse, 9 June, pp. 97−103.Google Scholar
Swissinfo. (2002). Forte mobilisation pour le deuxième pilier, 31 August. Available online at the address http://www.swissinfo.ch [accessed 29-Jun-2011].Google Scholar
Swiss Association of Actuaries. (2010). Abstimmung vom 7. März 2010: Senkung des Umwandlungssatzes in der Beruflichen Vorsorge: Informationen für die Mitglieder der Schweizerischen Aktuarvereinigung SAV. Available online at the address http://www.actuaries.ch [accessed 8 February 2010].Google Scholar
World Bank. (1994). Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth. The World Bank, Washington, DC.Google Scholar