Do Health and Longevity Create Wealth?

Health, of course, is vital for productivity and quality of life, and it is understood that as society accumulates more wealth it can provide better health benefits for its people. But health as a driver of the economy is a relatively new concept within scholarly and economics studies. In recent years, many of the foremost schools of economic thought have come to recognize health as a critical driver of the economy

The Case For Investing in Bonds During Retirement

For households seeking retirement income security, short-term deposits (such as money market accounts, certificates of deposit, and Treasury bills) seem an ideal and appropriate investment choice – particularly given the recent extraordinary turbulence in the financial markets. Over the past year, an investment in short-term deposits would have actually outperformed investments in corporate bonds and far outperformed corporate stocks. Retired households exhibit a strong preference for holding such apparently safe investments. One study found that 86 percent of households nearing retirement (ages 60-64) had bank accounts, while only 33 percent owned stocks directly and only 7 percent owned bonds directly. And the desire for short-term investments increased with age. But short-term investments, while safe, produce uncertain returns. This Issue in Brief highlights the trade-off that households must make between a guaranteed return of capital and a guaranteed return on capital – they cannot have both at the same time. Short-term deposits provide a guaranteed return of capital, but offer no guarantees as to the return the household will receive on its capital. In contrast, a portfolio of Treasury bonds of appropriate maturities provides a guaranteed return on capital, but with the return of capital guaranteed only at maturity. This brief argues that retired households seeking a secure and dependable income should prioritize return on capital over return of capital. For such households, the true risk-free asset is a portfolio of bonds and, in particular, inflation-protected bonds of appropriate maturities.

Making Your Nest Egg Last a Lifetime

Media attention on retirement security generally focuses on the need to save enough to enjoy a comfortable retirement. However, accumulating a nest egg is no longer the only significant challenge – the other is managing one’s nest egg in retirement. In contrast to previous birth cohorts who often received a lifetime income from a defined benefit pension plan, in today’s 401(k) world retirees must choose how to convert their accumulated savings into a monthly paycheck. One straightforward solution to the drawdown challenge is an immediate annuity, which turns a lump sum of income into a lifelong payment stream. However, for various reasons, such annuities have not proven broadly popular. Therefore, this brief examines several alternatives. All such strategies involve a trade-off between maximizing consumption and minimizing the risk of running out of money. Calculating the optimal strategy is really hard – maybe impossible. But, despite the complexity of the problem, some strategies are clearly superior to others...

Retirement and the Evolution of Pension Structure

Defined benefit pension plans have become considerably less common since the early 1980s, while defined contribution plans have spread. Previous research showed that defined benefit plans, with sharp incentives encouraging retirement after a certain point, contributed to the striking postwar decline in American retirement ages. In this paper we find that the absence of age-related incentives in defined contribution plans leads workers to retire almost two years later on average, compared to workers with defined benefit plans. Thus, the evolution of pension structure can help explain recent increases in employment among people in their 60s, after decades of decline.

Determinants and Consequences of Bargaining Power in Households

A growing literature offers indirect evidence that the distribution of bargaining power within a household influences decisions made by the household. The indirect evidence links household outcomes to variables that are assumed to influence the distribution of power within the household. In this paper, we have data on whether a husband or wife in the Health and Retirement Study %u201Chas the final say%u201D when making major decisions in a household. We use this variable to analyze determinants and some consequences of bargaining power. Our analysis overcomes endogeneity problems arising in many earlier studies and constitutes a missing link confirming the importance of household bargaining models. We find that decision-making power depends on plausible individual variables and also influences important household outcomes, with the second set of results much stronger than the first set. Current and lifetime earnings have significant but moderate effects on decision-making power. On the other hand, decision-making power has important effects on financial decisions like stock market investment and total wealth accumulation and may help explain, for example, the relatively high poverty rate among widows.

Life is Cheap: Using Mortality Bonds to Hedge Aggregate Mortality Risk

Using the widely-cited Lee-Carter mortality model, we quantify aggregate mortality risk as the risk that the average annuitant lives longer than is predicted by the model, and we conclude that annuity business exposes insurance companies to substantial mortality risk. We calculate that a markup of 3.7% on an annuity premium (or else shareholders%u2019 capital equal to 3.7% of the expected present value of annuity payments) would reduce the probability of insolvency resulting from uncertain aggregate mortality trends to 5% and a markup of 5.4% would reduce the probability of insolvency to 1%. Using the same model, we find that a projection scale commonly referred to by the insurance industry underestimates aggregate mortality improvements. Annuities that are priced on that projection scale without any conservative margin appear to be substantially underpriced. Insurance companies could deal with aggregate mortality risk by transferring it to financial markets through mortality-contingent bonds, one of which has recently been offered. We calculate the returns that investors would have obtained on such bonds had they been available over a long period. Using both the Capital and the Consumption Capital Asset Pricing Models, we determine the risk premium that investors would have required on such bonds. At plausible coefficients of risk aversion, annuity providers should be able to hedge aggregate mortality risk via such bonds at a very low cost.

The Dependency Ratio: What Is It, Why Is It Increasing, and What Are the Implications of the Increase?

The dependency ratio,which is the ratio of the number of persons aged under 18 or over 64 to the number aged between 18 and 64,is projected to increase dramatically in almost all advanced economies and many developing countries over the coming 50 years. But should the increase in the dependency ratio also be a matter for concern? Will we become impoverished because the output of each worker has to be shared with a growing number of dependants

The United States Longevity Insurance Market

This chapter documents the substantial decline in traditional sources of longevity insurance, and shows that published statistics on the individual annuity market greatly overstate its size and growth. It considers whether the decline in annuitization rates is cause for concern. It then documents in more detail the structure, size, and pricing of the individual annuity market, and discusses product innovations. It concludes by discussing policy options for increasing rates of voluntary annuitization

Kissing the Archimedeans

In this paper the three dimensional kissing problem will be related to the Platonic and Archimedean solids. On each polyhedra presented their vertices will have spheres expanding such that the center of each of these outer spheres are the vertices of the polyhedron, and these outer spheres will continue to expand until they become tangent to each other. The ratio will be found between the radius of each outer sphere, and the radius of an inner sphere such that each inner sphere\u27s center is the circumcenter of the polyhedron, and the inner sphere is tangent to each outer sphere. Every Platonic and Archimedean solid has a unique outer sphere to inner sphere ratio. The circumradius of the Platonic and Archimedean solids will be found by solving for the circumradius of the polyhedra\u27s vertex figure. After the circumradius is found, the relation between the edge length of the solids, and the circumradius is converted to the radius of the outer spheres, r, and the radius of the inner sphere, R