Explaining low annuity demand: an optimal portfolio application to Japan

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Sachi Purcal~John Pigott, Australia
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Summary:
Using an optimising financial planning model in the tradition of Merton (1969, 1971), and Richard (1975) we explore how individuals should determine their life insurance and annuity choices, given uncertainty about investment returns and mortality. Both consumption and bequests appear as arguments in the individual’s preference function. The model explicitly recognises the existence of social security in retirement, and of loadings on insurance premiums, due to administration costs in the life insurance and annuities markets. The model sheds light on the reasons for the thinness of voluntary life annuity markets worldwide. The relative importance of pre-existing annuitisation through social security, the role of bequests, and premium loadings are quantitatively assessed within a single optimising framework. Results are presented for a model specification calibrated to Japan.
 
Date: 2 June - Time: 10:30 to 12:00 - Room: 251
Theme: 9.A. Various topics