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Swimming with wealthy sharks: longevity, volatility and the value of risk pooling

Published online by Cambridge University Press:  15 March 2019

Moshe A. Milevsky
Moshe A. Milevsky*
Affiliation:
York University, Schulich School of Business, Toronto, Ontario, Canada
*
*Corresponding author. Email: milevsky@yorku.ca
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Abstract

Who values life annuities more? Is it the healthy retiree who expects to live long and might become a centenarian, or is the unhealthy retiree with a short life expectancy more likely to appreciate the pooling of longevity risk? What if the unhealthy retiree is pooled with someone who is much healthier and forced to pay an implicit loading? To answer these and related questions this paper examines the empirical conditions under which retirees benefit (or may not) from longevity risk pooling by linking the economics of annuity equivalent wealth to actuarially models of aging. I focus attention on the Compensation Law of Mortality which implies that individuals with higher relative mortality (e.g., lower income) age more slowly and experience greater longevity uncertainty. Ergo, they place higher utility value on the annuity. The impetus for this research today is the increasing evidence on the growing disparity in longevity expectations between rich and poor.

Keywords

AnnuitiesGompertz modelRetirementSocial SecurityUtilityH55G22
Type
Article
Information
Journal of Pension Economics & Finance , Volume 19 , Issue 2 , April 2020 , pp. 217 - 246
Copyright
Copyright © Cambridge University Press 2019

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