Can the Private Annuity Market Provide Secure Retirement Income?

IMF Working Papers, December 1, 2004

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Annuity premiums are often assumed to be constant, although they can be expected to vary with the yield curve.
Variations in premiums will become an important public policy issue as defined-contribution (DC) pension plans play an increasingly prominent role in providing retirement income.
As DC plan holders retire, many will annuitize at least a part of their account balances.
In the absence of current data on annuity prices, the paper relies on U.S. Treasury interest rate data to simulate the impact of interest rate variation on annuity premiums.
For a spectrum of feasible interest rates, the variation in retirement income is not negligible.

Use of U.S. Treasury interest rate data to simulate annuity-premium variation in lieu of current annuity-price data.
Analysis focuses on how movements in the yield curve affect annuity premiums and thereby retirement income outcomes for DC plan holders.

Variation in annuity premiums linked to the yield curve has policy relevance as DC plans gain prominence.
Policymakers should account for interest-rate–driven variability in retirement income when designing or regulating annuitization options within DC pension frameworks.

Subject: Financial institutions, Financial services, Insurance, Insurance companies, Labor, National accounts, Pensions, Personal income, Yield curve
Keywords: annuities, annuity, annuity diversification, annuity literature, annuity market, annuity payment, annuity premium, annuity provider, Europe, individual accounts, Insurance, Insurance companies, market result, Pensions, Personal income, Public pension systems, staggered annuity purchase, WP, Yield curve