“The Annuity Puzzle” by Richard MacMinn, Daniel Bauer, & Frederik Weber Comments by James Poterba 25 September 2009

Modeling Demand for Both Life Insurance and Annuities Little Attention to Explaining Both Demands in One Model: Corner Solutions Often Emerge Notable Exception: Bernheim’s (1991 JPE) Empirical Study of Annuity and Life Insurance Demand A Satisfactory Model Should Explain Both

Altruism: A Generalization of Bequest Motive How Can We Distinguish Altruism from a “Simple” Bequest Motive? What Does Altruism Imply About Inter vivos Gifts? Strong Predictions About Impact of Resource Shocks within Groups Linked by Altruism Is Altruism Defined Over Utility of Other Individual or Over Consumption?

Welfare Economics with Altruism Optimal Public Policy Calls for Subsidizing Gifts (Both Donor and Donee Benefit) A Person Who Attracts Altruistic Attention from Many Individuals Should Receive More Resources

Leading Explanations for Small Annuity Markets Precautionary Demand for Liquid Wealth: Risk of Health Care Bills, “Strategic” Demand Unattractive Annuity Prices: Adverse Selection, Insurance Company Profits, Mortality Pessimism Bequest or Altruistic Motives Regret-Aversion

Results from “Standard” Stochastic Lifecycle Models For One Person, with Uncertain Mortality and without Social Security or Late-Life Medical Costs, Even if EPDV = 0.80, Annuity Market Participation is Attractive Introducing Social Security (Consumption Floor) or Marriage Partner Substantially Raises Threshold for Annuity Purchase

Expected Present Discounted Value (EPDV) of Annuity Payouts per Premium Dollar EPDV NOM = Σ t=1,T S t *A NOM /{Π j=1,t (1+i j )} Survival Rates – Population Mortality vs. Annuitant Mortality, Projected Forward Discount Rates – Riskless Treasuries vs. High-Grade Corporates EPDV Does Not Recognize Insurance Value of Annuity to Individual

Money’s Worth of Individual Annuities: U.S Mortality Assumption Annuitant Mortality Table Population Mortality Table Interest Rate Corp’nTreasuryCorp’nTreasury Men Age Women Age