Discussion of
\What Determines Annuity Demand at Retirement"
by Guiseppe Cappelletti, Giovanni Guazzarotti & Pietro Tommasino
Dirk Krueger
University of Pennsylvania, CEPR, and NBER
ECB Conference
June 1, 2010
Background
This paper studies empirically the determinants of demand for annuities at retirement.
Theory:
{ Yaari (1965): If price of annuity is actuarially fair, in absence borrowing constraints and bequest motives risk averse households facing longevity risk should fully annuitize their wealth.
{ Brown, Davido and Diamond (2005) generalize this result.
Data:
{ Very few households annuitize private wealth: 70+ in US AHEAD
data: 8% own private annuities
{ Those that do are far from annuitizing it fully: SCF 2004 for 6585 old households: annuitized income (incl. DB pension, soc.
sec)/total income 50%:
Well known lack of annuitization puzzle.
If ever there were a prediction of economic theory that was
blatantly violated by the empirical evidence, it is that of full annuitization.
[Je Brown, NBER Reporter 2004]
Potential Reasons (Poterba 2008)
Demand Side
{ Precautionary demand for liquid wealth
{ Bequest motives
{ Access to public or informal private longevity risk insurance
Supply Side: Prices not actuarially fair (adverse selection, limited competition).
This paper
Uses SHIW data to study annuity demand, for various given prices.
Hypothetical questions posed to households about preferences over
two income streams, starting at age 65, until age of death T
A1
A2W
yi = 1000
y65:1 = W + 500
yi = 500
for i = 65:1; : : : ; T
for i = 65:2; : : : ; T
Question: how many households j state preference A1
A2W for
annuity of 500 over lump sum W; and what Xj correlate with this?
Main Results
Overall stated preferences
A1
A260000
80%
A1
A280000
68%
A1
A2100000
40%
Correlation of annuity demand with observables
Xj
Corr
Probit
Sex
0
0
Mar.
0
0
Kids
0
0
Health
+
+
Age
+
+
-
yd
+
+
Ed.
+
+
a
+
0
Lit.
+
+
-
Comments (I)
Given data on actual purchases of annuities, stated demand seems
large. Should we buy stocks of companies that o er annuities?
De ne
(W; r; T ) = W
PJ
500
j=65 (1+r)j
65 :
Companies should sell if
(W; r; T ) > 0: Risk-neutral, sel sh, non-liquidity constrained households should buy if (W; r; T ) < 0:
Istituto Nazionale di Statistica: in 2009, life expectancy in Italy at age
65 was 83.2 years (males) and 86.7 (females)
x 10
Profits of Issuer, W=100000
4
Zero Line
r=1%
r=4%
r=7%
8
6
Profits
4
2
0
-2
-4
-6
70
75
80
Lifetime Horizon
85
90
95
x 10
Profits of Issuer, W=80000
4
Zero Line
r=1%
r=4%
r=7%
6
4
Profits
2
0
-2
-4
-6
-8
70
75
80
Lifetime Horizon
85
90
95
x 10
Profits of Issuer, W=60000
4
5
Zero Line
r=1%
r=4%
r=7%
Profits
0
-5
-10
70
75
80
Lifetime Horizon
85
90
95
Comments (I)
In terms of pure present discounted values, annuities look good for
W = 60; 000 and 80; 000 (and not so bad for females and males with
higher than average life expectancy).
Perhaps not surprising that a large share of households would want to
buy (especially with risk aversion).
Given the results, why are actual choices so di erent? What is W in
the data?
Comments (II)
SHIW has signi cant panel dimension. Contains additional information
about households to help predict annuity demand.
Examples: might be able to construct measures of permanent income,
income risk, health risk (etc.) that one cannot measure in pure crosssection.
Might help to construct household level empirical proxies for a) precautionary demand for liquid wealth, b) bequest motives c) access to
informal private longevity risk insurance.
Table 1
Response rates in the Survey of Household Income and Wealth
Year
Contacted
Responses
Refusals
Absent units
Ineligible
Gross
Net
response rate response rate
families
units
1989
22,344
8,274
9,427
3,855
788
37.0
38.4
1991
25,210
8,188
6,962
9,481
579
32.5
33.2
1993
15,759
8,089
3,152
2,761
1,756
51.3
57.8
1995
15,606
8,135
3,653
2,510
1,308
52.1
56.9
1998
16,268
7,147
6,441
2,680
1,400
43.9
48.1
2000
20,882
8,001
10,461
2,420
802
38.3
39.8
2002
23,356
8,011
14,179
1,166
476
34.3
35.0
2004
22,018
8,012
12,991
1,015
549
36.4
37.3
2006
18,510
7,768
6,603
4,139
304
42.0
42.7
Note: Ineligible units include the families of persons unknown, dead or emigrated. The gross response rate is the
ratio of responses to contacted families. The net response rate is the ratio of responses to contacted families net
of ineligible units.
Table A1
Panel households of the SHIW, 1987-2006
Year of first interview
1987
1989
1991
1993
1995
1998
2000
2002
2004
2006
Cross-sectional sample size
Percentage of total sample
1987
8027
1989
1206
7068
1991
350
1837
6001
8027
8274
14.6
8188
26.7
22
Year of survey
1993 1995 1998 2000
173
126
85
61
877
701
459
343
2420 1752 1169
832
4619 1066
583
399
4490
373
245
4478 1993
4128
8089
42.9
8135
44.8
7147
37.3
8001
48.4
2002
44
263
613
270
177
1224
1014
4406
2004
33
197
464
199
117
845
667
1082
4408
8011
45.0
8012
45.0
2006
30
159
393
157
101
636
475
672
1334
3811
7768
50.9