Wharton Pension Research Council Working Papers

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It is well known that purchasers of annuities have lower mortality than the general population. Less widely known is the quantitative extent of this adverse selection and how it varies across countries. This paper proposes and applies several methods for comparing alternative mortality tables and illustrates their impact on annuity valuation for men and women in the US and the UK. Our results indicate that the relatively lower mortality among older Americans who purchase annuities is equivalent to using a discount rate that is 50-100 basis points below the UK rate for compulsory annuitants, or 10-20 basis points lower than the UK rate for voluntary annuitants. We then draw on the mortality experience of over half a billion lives to estimate mortality differentials due to varying degrees of adverse selection controlling for country, gender, and an allowance for mortality improvements. Results show that adverse selection associated with the purchase of individual annuities reduces mortality rates by at least 25% in the international context. We also find that the system of mortality tables used to value Japanese annuities is quite distinct from international norms.

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©2001 Pension Research Council of the Wharton School of the University of Pennsylvania. All Rights Reserved.


Support for this research was provided by the Wharton-SMU Research Center at Singapore Management University, the Pension Research Council at the Wharton School, the National Bureau of Economic Research, and the Economic Research Institute of the EPA of Japan. Without implicating them, we appreciate comments provided by John Piggott, Yoshio Nakamura, Takayuki Igawa, Jean Lemaire, Ryota Okamoto, Masaaki Ono, Junichi Sakamoto and Kenji Sekine. Useful suggestions and data were also provided by Jeffrey Brown, Amy Finkelstein, David Knox, Mamta Murthi, Saachi Purcal, and Steve Smallwood. Opinions and errors are solely those of the authors and not of the institutions with whom the authors are affiliated.© 2001 Mitchell and McCarthy. All Rights Reserved.

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Date Posted: 13 September 2019