UNDERSTANDING PRIVATE SECTOR LONGEVITY INSURANCE ANNUITIES
By John Turner
Literature REview Overview
While all annuities provide retirees some longevity insurance, the term “longevity insurance annuity” refers specifically to deferred annuities that begin payment at an advanced age, such as age 82, which is a little less than the life expectancy at age 62 in the United States. These annuities provide insurance against running out of money at advanced older ages. The original social security programs in many countries, including Canada, Germany, and the United States, were longevity insurance programs. The relative merits of longevity insurance annuities compared to immediate annuities depend on several factors, including the person’s life expectancy, their uncertainty as to their life expectancy, their degree of risk aversion, their degree of time preference, their amount of savings, whether they have an annuity from a defined benefit plan, and the amount of their Social Security benefits. The private sector can provide longevity insurance annuities in three ways: employer-provided pension and retirement savings plans, individual retirement accounts (IRAs), and individual purchases outside of a pension or retirement savings account. While ignorance and lack of rational behavior may explain why some workers do not choose to annuitize, the apparent prevalence of adverse selection is evidence of rational behavior.
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About the Author
John A. Turner is Director of the Pension Policy Center.