A quantification of the financial implications of the design of a funded, collective defined contribution (CDC) pension scheme is presented and illustrated. It is done through an attribution analysis, which allows the importance of various elements of CDC scheme design to be determined. The model of a CDC scheme analysed is based lightly on the first CDC scheme set to be approved in the UK. In the CDC scheme analysed, contributions are fixed and the initial benefit accrued by each contribution is fixed. Once accrued, benefits are subsequently adjusted annually in response to changes in assumptions and returns. An attribution of the benefit payments shows that this design gives higher benefits to the first generations and lower benefits to the last generations, for a scheme which starts with no members. The contributions paid also affect the balance of benefits paid between generations. Too high a contribution is to the advantage of the first generations. Too low a contribution is in the interests of the later generations. The conclusion, within the simple model considered, is that a constant benefit accrual is an important design choice. Its financial consequences across all generations should be carefully analysed, if it is intended to be implemented. Additionally, contributions should be reviewed regularly in such a CDC scheme, to ensure that cross-subsidies are not borne excessively by particular generations.

In most industrialised countries, one of the major societal challenges is the demographic change coming along with the ageing of the population. The increasing life expectancy observed over the last decades underlines the importance to find ways to appropriately cover the financial needs of the elderly. A particular issue arises in the area of health, where sufficient care must be provided to a growing number of dependent elderly in need of long-term care (LTC) services. In many markets, the offering of life insurance products incorporating care options and LTC insurance products is generally scarce. In our research, we therefore examine a life annuity product with an embedded care option potentially providing additional financial support to dependent persons. To evaluate the care option, we determine the minimum price that the annuity provider requires and the policyholder’s willingness to pay for the care option. For the latter, we employ individual utility functions taking account of the policyholder’s condition. We base our numerical study on recently developed transition probability data from Switzerland. Our findings give new and realistic insights into the nature and the utility of life annuity products proposing an embedded care option for tackling the financing of LTC needs.

This paper reports the results from a large telephone survey of 1,000 retiring white-collar workers in Sweden. Shortly before the interview, the participants at age 65 had a choice of receiving a life annuity by default or opting for a fixed-term payout, with a minimum payout length of 5 years. Large monetary amounts were at stake in the payout decision of the survey participants; the average monthly pension payment under the life annuity amounted to US $280. Comparing the survey responses with administrative records on actual payout choices, I find that a majority of retiring white-collar workers fail to recall their payout decision. The recollection rate is much lower among annuitants (those who chose the default option); only 40% of the annuitants accurately recalled their payout decision compared to 77% of those who opted for a fixed-term payout. Beyond payout choice, few individual characteristics predict successful recollection.

The previous conclusion that a uniform lump-sum estate tax could implicitly provide annuity income was reached by ignoring the inheritance that agents receive. However, when the agents leave a bequest, they should also receive an inheritance from their parents. Thus, we make the inheritance received—bequests left cycle complete and fully endogenous. Interestingly, the differential timing and sizes of inheritance then generate unequal wealth effects even with actuarially fair annuity markets. To restore the first best, the government has to adopt an estate tax regime that is no longer uniform. Thus, once bequest is fully endogenized, a uniform estate tax no longer bears the annuity role. Further, the differential timing in receiving inheritance creates an unequal wealth distribution, which is also nonstationary. The paper manifests the importance of accounting for and tracing the inheritance received by agents for any crucial policy recommendation.

We have designed and implemented an experimental module in the 2014 Health and Retirement Study to measure older persons' willingness to defer claiming of Social Security benefits. Under the current system’ status quo where delaying claiming boosts eventual benefits, we show that 46% of the respondents would delay claiming and work longer. If respondents were instead offered an actuarially fair lump sum payment instead of higher lifelong benefits, about 56% indicate they would delay claiming. Without a work requirement, the average amount needed to induce delayed claiming is only $60,400, while when part-time work is stipulated, the amount is slightly higher, $66,700. This small difference implies a low utility value of leisure foregone, of under 20% of average household income.

Tontines, retirement products constructed in such a way that the longevity risk is shared in a pool of policyholders, have recently gained vast attention from researchers and practitioners. Typically, these products are cheaper than annuities, but do not provide stable payments to policyholders. This raises the question whether, from the policyholders' viewpoint, the advantages of annuities and tontines can be combined to form a retirement plan which is cheaper than an annuity, but provides a less volatile retirement income than a tontine. In this article, we analyze and compare three approaches of combining annuities and tontines in an expected utility framework: the previously introduced “tonuity”, a product very similar to the tonuity which we call “antine” and a portfolio consisting of an annuity and a tontine. We show that the payoffs of a tonuity and an antine can be replicated by a portfolio consisting of an annuity and a tontine. Consequently, policyholders achieve higher expected utility levels when choosing the portfolio over the novel retirement products tonuity and antine. Further, we derive conditions on the premium loadings of annuities and tontines indicating when the optimal portfolio is investing a positive amount in both annuity and tontine, and when the optimal portfolio turns out to be a pure annuity or a pure tontine.

This paper examines the importance of pensions (employment and social security), taxes and government transfers for alternative retirement savings drawdown strategies (DS), compared to the conventional approach in published literature of using a gross income concept obtainable from retirement savings alone. Using a lifetime utility framework, our longitudinal dynamic micro-simulation model incorporates risk aversion, stochastic markets, stochastic mortality and the interactions among sources of retirement income within the complex Canadian tax and social benefit system, enabling us to rank commonly advocated DS and to ask whether incorporating pensions, taxes and transfers alters those rankings. Our findings show the importance of treating the evaluation of alternative DS as a comprehensive and integrated problem by including all sources of income — including pensions, taxes and government transfers. Using restricted income measures can potentially lead to simplistic, and possibly misleading, conclusions.

Means-tested retirement benefits create incentives to cash out pension wealth. Individuals trade off the advantages from annuitization, receiving longevity risk insurance, to the disadvantages, giving up ‘free’ wealth in the form of means-tested supplemental income. We quantify the impact of means-tested benefits with a calibrated life-cycle model, demonstrating that they substantially reduce the desire to annuitize especially for low and intermediate levels of pension wealth. Using an administrative dataset on pension choices, we show that the model's predicted fraction of retirees choosing the annuity is able to match the annuitization pattern of occupational pension wealth observed in Switzerland. On the base of our model, we also assess alternative policies such as mandatory annutization and tougher asset tests.

Our study uses the data collected during the implementation of the tobacco buyout program in Kentucky to evaluate how rural households, diverse in income, age, family structure, location, education level, and other characteristics, made a choice between annuities and a lump-sum payment. Subjects in our field experiment did not have to retire or change their employment, as did subjects in many field studies of the choice between annuities and lump-sum payments, which allowed us to evaluate the relationship between the option choice and a decision whether to exit the tobacco market. Our results suggest that while discounted utility theory gives acceptable predictions of the farmers' behavior, other factors have to be taken into consideration. First, there are consistent biases that describe individual intertemporal behavior, such as availability bias or acquiescence bias. Second, there is a certain degree of heterogeneity in individual intertemporal preferences that correlates with their personal characteristics, such as education and production status. Third, our analysis revealed that the decision to exit the tobacco market positively correlated with the decision to take a lump-sum payment.