DP7940 How Deep is the Annuity Market Participation Puzzle?

Author(s): Joachim Inkmann, Paula Lopes-Cocco, Alexander Michaelides
Publication Date: August 2010
Keyword(s): Annuities, bequest motive, life insurance, portfolio choice
JEL(s): E21, G11, H00
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7940

Using U.K. microeconomic data, we analyze the empirical determinants of voluntary annuity market demand. We find that annuity market participation increases with financial wealth, life expectancy and education and decreases with other pension income and a pos- sible bequest motive for surviving spouses. We then show that these empirically motivated determinants of annuity market participation have the same, quantitatively important, effects in a life-cycle model of annuity and life insurance demand, saving and portfolio choice. Moreover, reasonable preference parameters predict annuity demand levels comparable to the data. For stockholders, a strong bequest motive can simultaneously generate balanced portfolios and low annuity demand.