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Adverse Selection in the Annuities Market and the Impact of Privatizing Social Security
Author(s) -
Walliser Jan
Publication year - 2000
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/1467-9442.00206
Subject(s) - stylized fact , adverse selection , economics , social security , annuity , life annuity , selection (genetic algorithm) , business cycle , overlapping generations model , actuarial science , microeconomics , macroeconomics , finance , pension , computer science , artificial intelligence , market economy
The observation that few Americans purchase life annuities has often been attributed to adverse selection. A still unanswered question is whether observable price increases caused by adverse selection can be generated endogenously in a life cycle model. This paper calibrates a pure life cycle model for a characteristic US cohort and reproduces three stylized facts. Adverse selection increases annuity prices by 7–10 percent; the cost of adverse selection rises with the age of the annuitant; and the cost is smaller for females than for males. Social security privatization could reduce annuity prices by between 2 and 3 percent.