Bequests and heterogeneity in retirement wealth

Households hold vastly heterogeneous amounts of wealth when they reach retirement, and differences in lifetime earnings explain only part of this variation. This paper studies the role of intergenerational transmission of ability, voluntary bequest motives, and the recipiency of accidental and intended bequests (both in terms of timing and size) in generating wealth dispersion at retirement, in the context of a rich quantitative model. Modeling voluntary bequests, and realistically calibrating them, not only generates more wealth dispersion at retirement and reduces the correlation between retirement wealth and lifetime income, but also generates a skewed bequest distribution that is close to the one in the observed data

Mortality-Indexed Annuities

Longevity risk has become a major challenge for governments, individuals, and annuity providers in most countries, and especially its aggregate form, i.e. the risk of unsystematic changes to general mortality patterns, bears a large potential for accumulative losses for insurers. As obvious risk management tools such as (re)insurance or hedging are less suited to manage an annuity provider’s exposure to aggregate longevity risk, the current paper proposes a new type of life annuities with benefits contingent on actual mortality experience, and it also details actuarial aspects of implementation. Similar adaptations to conventional product design exist in investment-linked annuities, and a role model for long-term contracts contingent on actual cost experience is found in German private health insurance so that the idea is not novel in general, but it is in the context of longevity risk. By not or re-transferring the systematic longevity risk insurers may avoid accumulative losses so that the primary focus in an extensive Monte-Carlo simulation is on the question of whether and to what extent such products are also advantageous for policyholders in contrast to a comparable conventional annuity product

Consumption Over the Life Cycle: A Selected Literature Review

Simple life cycle and permanent income hypotheses imply that changes in consumption should be unforecastable. Rational forward-looking agents ought to smooth consumption over the life cycle and exhaust the asset stock accumulated during the working career in retirement. Empirical observations seem not to conform to these predictions of the simple theory of intertemporal choice which has given rise to elaborations on the benchmark model. The theoretical discussion of this paper concentrates on the litareture dealing with the seemingly problematic empirical regularities and on proposed explanations. The review of literature focuses particularly on the life cycle issues of consumption behaviour.consumption, life cycle, permanent income

Assessing Investment and Longevity Risks within Immediate Annuities

Life annuities provide a guaranteed income for the remainder of the recipient’s lifetime, and therefore, annuitization presents an important option when choosing an adequate investment strategy for the retirement ages. While there are numerous research articles studying annuities from a pensioner’s point of view, thus far there have been few contributions considering annuities from the provider’s perspective. In particular, to date there are no surveys of the general risks within annuity books. The present paper aims at filling this gap: Using a simulation framework, it provides a long-term analysis of the risks within annuity books. In particular, the joint impact of mortality risks and investment risks as well as their respective influences on the insurer’s financial situation are studied. The key finding is that, under the model specifications and using annuity data from the United Kingdom, the risk premium charged for aggregate mortality risk seems to be very large relative to its characteristics. Possible reasons as well as economic implications are provided, and potential caveats are discussed

The importance of institutions in expansionary fiscal consolidations. A critical assessment of non-Keynesian effects

The short-term effects of fiscal consolidation have attracted an increasing attention from both the academia and policy makers in the recent years. Authors in the literature on non- Keynesian effects usually put the emphasis on the need for the devaluation of the national currency, the accommodating reaction of the monetary authority and the favourable international economic conditions as the necessary accompanying tools of fiscal consolidation, in order to realise short-term expansionary effects. Some also add the necessity of large-scale adjustment; while others support the view that a high and increasing debt ratio or increasing government spending, by triggering an unavoidable adjustment, is the key to experiencing short-term expansionary effects. The composition of adjustment also became a crucial explanation for non-Keynesian effects. However, as the following critical assessment of the literature on expansionary fiscal consolidations will reveal, institutional conditions, such as the importance of the depth of financial intermediation and the influencing role of labour market structure, can prove to be crucial in the occurrence of the desired expansionary short-term effects