Research
Research
Job Market Paper
Welfare Effects of Uniform Variable Annuities for Individuals with Different Educational Levels [.pdf]
jointly with Anja De Waegenaere and Theo Nijman
Abstract: This paper examines the welfare losses or gains that individuals with different educational levels face when they are offered a variable annuity that is not tailored to their risk preferences and/or survival rates. We combine education-specific mortality projections of the Dutch population with a range of reasonable risk preferences to quantify the welfare losses due to mismatches in mortality rates and risk preferences. We find that for individuals with lower education levels, the welfare losses due to inadequate mortality assumptions can be substantially bigger than the welfare losses they face from an inadequate risk preference assumption. More generally, we find that ignoring the effects of heterogeneity in mortality rates can lead to a large over- or underestimation of the welfare effects of uniform variable annuities. Our study therefore highlights the importance of considering differences in survival rates when evaluating the welfare effects of uniform annuities offered to annuitants with different educational levels.
Working Papers
1. The Effect of Pension Tax Treatment on Optimal Consumption and Investment Decisions Over the Life-cycle [.pdf]
jointly with Anja De Waegenaere and Theo Nijman
Abstract: This paper investigates how different pension tax treatments affect optimal accumulation and decumulation decisions over the life-cycle. We consider a CRRA investor who faces an uncertain lifetime with borrowing and liquidity constraints, subject to taxes on labor income, pension contribution, capital gains, pension income, and lump-sum withdrawal. Under the tax regimes that are dominant in the United States, Australia, Netherlands, and Korea, we determine the optimal consumption and investment decisions for four strategies: accumulating pension wealth in a taxable free wealth account or a tax-favored pension account, combined with decumulating accrued wealth at retirement date either with an optimal variable annuity or without longevity insurance. Our results show substantial differences in optimal consumption and investment decisions as well as welfare effects in the presence/absence of taxation over the life-cycle, suggesting that ignoring taxes may significantly distort the welfare implications.
2. An Analysis of Variable Annuities with Guaranteed Minimum Accumulation Benefits [.pdf]
jointly with Anja De Waegenaere and Theo Nijman
Abstract: We analyze the properties of three types of variable annuities with an embedded guaranteed minimum accumulation benefit (GMAB). The GMAB ensures minimum investment returns on the annuity premium net of the costs of financing the guarantee. The three annuities have a given predefined target benefit level for each future period and differ in whether the target level is reached in expectation, in the median scenario, or in the scenario where the realized returns equal the expected returns. In our main analyses, we take the viewpoint of an annuitant who aims for given target benefit levels and compare the properties of the three types of annuities with specific emphasis on the effect of the guarantee. We also analyze the alternative case where the wealth to be spent on the annuity is given rather than the target benefit levels. Our study suggests that insurers and consumers should be aware of the implications of at first sight small differences in the specification of products, which may lead to substantial differences in the annuity benefits.
3. A Reverse Mortgage or An Annuity Product? An Analysis of Money's Worth Ratio Considering the Value of Living
jointly with Joo-Ho Sung
Abstract: The low birth rate, high elderly dependency, and low growth rate have imposed curbs on government spending on the social security system. A Korean reverse mortgage program, called Joo Taek Yeon Keum (JTYK), offers a convenient vehicle for alleviating the income vulnerability of the elderly without imposing huge government expenses. Moreover, elderly people are able to dwell in their houses until they die regardless of any fluctuation in the housing price or the amount of total annuity payment. By incorporating this advantage over the regular annuity, this paper compares the money's worth ratio of the JTYK and a single premium immediate annuity (SPIA) using a simulation method with stochastic models. The result suggests that JTYK may outperform the SPIA if a retiree utilizes the reverse mortgage program before age 75.