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Pension Demand and Utility: The Life Annuity Puzzle

Author

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  • Tomáš Cipra

    (Faculty of Mathematics and Physics, Charles University of Prague)

Abstract

This paper shows by means of the concept of utility that annuitization through life annui-ties or a pension can be an efficient instrument for the economic assurance of seniors. Various quantitative arguments are presented supporting this statement (e.g. annuity equivalent wealth [AEW] is calculated using Czech data). In conclusion, some practical arguments are mentioned regarding why the real demand on life annuities contradicts this result so that a so-called annuity puzzle arises in pension practice.

Suggested Citation

  • Tomáš Cipra, 2014. "Pension Demand and Utility: The Life Annuity Puzzle," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 64(3), pages 213-232, June.
    • Handle: RePEc:fau:fauart:v:64:y:2014:i:3:p:213-232
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    References listed on IDEAS

    as
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    4. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    5. Cannon, Edmund & Tonks, Ian, 2008. "Annuity Markets," OUP Catalogue, Oxford University Press, number 9780199216994.
    6. Mitchell, Olivia S. & Utkus, Stephen P. (ed.), 2004. "Pension Design and Structure: New Lessons from Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780199273393.
    7. James M. Poterba, 1994. "Introduction to "International Comparisons of Household Saving"," NBER Chapters, in: International Comparisons of Household Saving, pages 1-10, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    annuity equivalent wealth; annuity puzzle; consumption strategy; pension demand; pension utility;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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