COMMENTS ON “HEALTH AND MORTALITY DELTA: ASSESSING THE WELFARE COST OF HOUSEHOLD INSURANCE CHOICE” BY KOIJEN, VAN NIEUWERBURGH, AND YOGO Mark J. Warshawsky, AEI November 1, 2013 Personal Retirement Challenges and Financial Solutions, NBER Meeting

Focus of my Comments This is a multi-faceted complex paper with much methodology and several conclusions Empirical work is based on males age 51 and older in the HRS Focus on the following conclusion: “the unexplained variation in the degree to which households are annuitized, rather than the average level at which they are annuitized, is puzzling from the perspective of life-cycle theory,” which seems to arise from the “heterogeneity and inertia that arises from passive annuitization through private pensions.” I will add some perspectives from empirical trends in pensions, life, health and long-term care insurance, and some important methods and findings in the literature, which, to my reading, are not reflected in paper and might matter to the above conclusion

Trends in Pensions Over this time, US (and UK) has gone from many workers in private sector being covered by DB plans to few, as plans have been closed, frozen, and terminated At the same time, about half of traditional DB plans have converted to hybrid plans (owing to lower sponsor risk (see Pang and Warshawsky (2013) and employee desires) At the same time, about half of remaining traditional DB plans have a lump-sum choice and most participants take it; employers respond to employee desires Relatively few DC plans offer life annuities But both DB and DC plans are subject to minimum distribution rules past age 70- 1/2, not a life annuity, even though it may look like one Other non-annuity distributional forms are taken Unisex “pricing” of employer benefits; no underwriting Big distinction between private and public sector, including re indexation of benefits According to Gustman and Steinmeier, significant confusion between DB and DC plan exists among HRS respondents Probably also confusion on difference between immediate and deferred annuities Outside UK, underwriting of individual life annuities is not common, although it exists

Trends in Long-term Care Insurance Underwriting is significant issue for LTCI – at age 65, 25% are rejected, at age 75, 33% are rejected (Kemper, Spillman and Murtaugh (1995)); if anything, this has worsened with time Very few LTCI policies are sold with immediate comprehensive lifetime coverage; rather exclusion periods are long (up to year), 2 – 3 year coverage is common, inflation indexation is not universal, and daily benefit is often less than full nursing home rates in area. LTCI market has suffered a crisis in last seven years or so, with major insurers pulling out, current coverage being repriced upwards, and offered benefits shrinking, owing to lapse assumption mistakes by insurers and Federal Reserve policy Standard LTCI has a “fixed” premium for lifetime of policy, not a term structure Until 2013, unisex pricing was used, resulting in high loads for men Some coverage, especially since 2005, is a “partnership” with Medicaid According to Brown and Finkelstein (2007, 2008), lack of LTCI purchase owes to Medicaid crowd-out; some empirical support from across-state variation According to DeNardi, French, and Jones (2013), significant Medicaid coverage of retirees in middle-income and above brackets at older ages There has also been some “gaming” of Medicaid by the wealthy, albeit likely declining with time

Trends in Life Insurance Many types of coverage exist, both individual and group; variety is indeed significant in reality Some is classic term with fixed nominal dollar benefit and rising premium with age But significant coverage is also “declining term”, both in the individual market (especially to cover mortgages) and group, to greater or lesser extent Also, e.g., 20-year term (implicit cash value) First $50,000 of coverage is tax-free benefit from employer, not indexed Underwriting is significant in individual market Competition and marketing have increased and changed over time period, with Internet expansion

Trends in Health Insurance Retiree health insurance coverage from prior employer has disappeared almost completely in private sector; no accrual Some decline in active employee coverage from employers; also some decline in employer subsidy as costs have skyrocketed Shift to high-deductible plans with HSAs/HRAs, especially in late 2000s More coverage by public sector – Medicaid, CHIP, TAA subsidy Medigap policies standardized in 1990s, but with wide range of coverage Part D Medicare introduced in 2006; CMS website is now quite helpful and detailed; widespread coverage but not universal – non-coverage may be rational given persistence in drug usage Public sector still gives retiree health insurance to employees

Other Comments Bequest measurement in utility function seems non-standard; see DeNardi, French, and Jones (2010), Ameriks, Caplan, et.al. (2011), Abel and Warshawsky (1988) Health status measurement also seems non-standard; why not measure directly as in Brown and Warshawsky (2013) using the HRS Exclusion of HRS information on asset allocation may cause loss of power in tests, as theory (see Pang and Warshawsky (2010)) would posit that stock allocation should increase with age with laddered life annuity coverage (which also hedges LTCI risk, as noted by authors) Life care annuity is a solution to separate LTCI and annuity market problems Laddered immediate annuities, with fixed percentage SWs from increasing equity portfolio is a solution for retirement income problem; see Warshawsky (2012)